Loans are an excellent way to satisfy desires that your normal income cannot fulfil. However, an unforeseen loan has the potential to trap you in debt. Thus, in order to maintain a healthy financial life, it is critical to take quick corrective action to lessen your loan burden.
Allow me to illustrate this with an example. Mr ‘A’ got an irrational loan after succumbing to a bank’s offer of a pre-approved auto loan up to Rs 10 lakh. His current vehicle was in excellent shape, and there was no reason to sell it. Despite this, he opted to sell his old automobile and purchase a new one after receiving the bank’s offer. Mr. A was blind to the fact that a new loan might have an effect on his other financial goals, such as retirement savings. While the bank’s loan offer may appear appealing, it should be accepted only if you want financial assistance to complete a critical aim.
We explain some critical recommendations in this section to assist you in reducing your loan burden.
1) Your EMI should be affordable.
Prior to applying for a loan, you should determine the maximum EMI you can comfortably repay and adjust the loan’s period accordingly. Take on no more debt than you can comfortably repay; otherwise, your chances of defaulting are considerable. The most accurate way to determine your borrowing capacity is to look at the money remaining after meeting all of your normal costs, including savings, investments, and taxes. It is critical to note here that failing to repay EMIs on time will have a negative influence on your credit score and may hinder your future loan eligibility. Therefore, carefully consider your EMI payments capacity before applying for a loan.
2) Tenure should be a fluid concept.
You should exercise some leeway when determining the term of your perosnal loan. As your income grows, so does your repayment capacity, and you can easily repay the loan ahead of schedule and save a significant amount of interest. If you are having difficulty with your EMIs, talk with your lender to extend your duration so that your EMI becomes cheaper.
3) Insure large loans adequately
When you take out a large-ticket loan, sufficient insurance coverage can shield you from a variety of hazards that, if uninsured, can have a negative influence on your ability to repay the loan. For instance, a disability insurance policy can assist a recently incapacitated individual in obtaining the sum insured to cover both his normal costs and EMI payments. Similarly, if the borrower dies during the policy duration, a life term policy can assist the borrower’s dependents in repaying the loan EMI. Thus, it makes sense to maintain enough insurance and minimise loan stress caused by future uncertainty.
4) The ability to refinance the loan
The interest rate on a loan may not remain constant over the loan’s term. If your lender increases the interest rate above the market rate, do not be afraid to switch lenders to minimise your EMI load. You must weigh the advantages and disadvantages of moving the debt. Generally, it is preferable to swap loans within the loan’s beginning phase to maximise interest savings. If you transfer during the last leg of the loan, your savings may be negligible and you may forfeit any tax benefits. Additionally, keep the prepayment penalty in mind while switching loans.
5) Consolidate your debts
Managing various loans can be challenging. In this case, you may wish to consolidate all of your loans into one. For instance, you may have a personal loan, a gold loan, a credit card loan, or a car loan. The EMI dates and interest rates for all loans may vary. A missed EMI might have a detrimental effect on your credit score. Therefore, you can either request that your bank consolidate all of your loans into one, or you can ask for a loan against security to repay all of your tiny and high-interest loans, reducing your overall loan count to one or two. Always consider the impact of prepayment penalties imposed by banks when consolidating loans.
Reduce the amount of debts you have can relieve you of significant loan burden. Prior to pursuing debt consolidation, you should verify the interest rate on the final loan.
