How to Get the Most Out of Your Loan

Rajeev Navlur, a Mumbai-based marketing manager, prioritized repaying his home loan to purchase a Gurgaon flat before booking it. He started planning for EMIs even before the loan was approved, ensuring a smooth and efficient process.

Navlur, a construction worker, decided to suspend EMIs for 15 months and only pay simple interest on lender-disbursed funds. He aggressively saved to cover the EMI for a year, selling underperforming mutual funds, starting a recurring deposit, and even putting aside the final settlement from his former company when he switched jobs.

Navlur borrowers often face harsh experiences, including extended loan tenures, high credit card charges, and harassment from lenders due to missed EMIs. Those who have taken multiple loans are particularly affected, as even one missed EMI can damage their credit report and make future loan acquisitions more challenging.

If you also find it difficult to repay your loans, you may need to tweak your approach. In the pages that follow, we outline some strategies that can help you manage your debt situation without stressing your wallet.

The first step is to repay high interest loans

Prioritize loan repayment by listing outstanding loans and identifying those that need to be addressed first. Ravi Raj, Cofounder and Director of CreditVidya, advises attacking loans with the highest interest rates, such as credit cards and personal loans, to reduce the interest burden. Pay the maximum amount possible against the high-cost loan without jeopardizing your financial stability.

Hemant Rustagi, CEO of Wiseinvest Advisors, suggests that paying off high-interest debt first can reduce total interest paid on all loans. However, this should not compromise the regular EMIs on other loans, which must continue.How to Get the Most Out of Your Loan

The 'debt snowball' strategy, which involves reducing the number of loans by eliminating the smallest one first, can help alleviate pressure but may not reduce aggregate debt faster. It may keep you in debt longer and cost more than the avalanche approach. Prioritizing debt repayments should also consider tax benefits on some loans.

Tax benefits on loans can reduce the effective cost for the borrower. For example, an education loan with a 12% interest rate is tax deductible, reducing the cost to 8.5%. The same applies to home loans, with no need to end tax-advantaged loans earlier.

The statement suggests that repayments should be increased with an increase in income

To repay loans faster, increase the annual percentage rate (EMI) with every income increase. For example, a borrower with an 8% raise can increase EMIs by 5%. For a 20-year home loan, a modest increase of Rs 1,000 annually can end the loan in just 12 years, saving almost Rs. The impact of this modest increase is significant, as it helps reduce loan burden without stressing the wallet.

Raj advises prioritizing loan prepayment when additional money comes in, and directing additional payments towards costlier loans when having multiple loans running simultaneously. This helps reduce loan burden without stressing your wallet.

Utilize windfall gains to pay off high-interest debt

If you've received a bonus, don't spend it on a new gadget. Instead, use the money to pay off your debts aggressively. Use windfall gains like income tax refunds, maturity proceeds from life insurance policies, and bonds to pay off high-cost loans like credit cards or personal loans. Suresh Sadagopan, Founder of Ladder 7 Financial Services, advises using a portion of the bonus to reduce debt.

Banks may impose a prepayment penalty of up to 2% of the outstanding loan amount, although the RBI does not allow it for housing loans with floating rate interest. Many banks charge prepayment penalties for fixed rate home loans. Lending institutions typically do not charge prepayment penalties if the amount paid does not exceed 25% of the outstanding loan at the beginning of the year.

your wallet by converting credit card dues to EMIs

Credit cards offer interest-free credit for up to 50 days, but reckless spending can result in high interest rates. Regularly rolling over dues can result in 3-3.6% interest on the outstanding balance, resulting in a 36-44% annual interest rate. If unable to pay a large bill, ask the credit card company to convert dues into EMIs, as most companies are willing to allow customers to pay on time.

Credit card bills can be converted into an EMI option, providing breathing space for those with large sums. However, missed EMIs can increase the regular interest rate. Personal loans, which can charge up to 18-24%, are also a cost-effective alternative to credit card rollovers, but may be more expensive.

Utilize current investments to repay debt

To improve a bad debt situation, investors can use their existing investments, such as life insurance policies or PPFs, to pay off loans. The PPF allows investors to take loans against the balance from the third financial year, with a maximum of 25% of the previous year's balance to be repaid within three years.

The loan's interest rate is 2% higher than the PPF interest rate, currently at 10.5%, which is lower than other loans. However, a higher interest rate is charged if the loan isn't repaid within 36 months.

Gold holdings can be used to pay off high-cost credit card debt, as suggested by Raj. Additionally, some investments can be liquidated completely, such as fixed deposits with a 9% interest rate and a 16% personal loan servicing at 16%. However, it's important to withdraw from one investment to avoid potential losses.

Consolidate or refinance is a crucial financial process that involves the consolidation or reduction of debts

If you have multiple loans and miss an EMI, it can lead to penal interest and a bad credit score. Consolidating your debt into one single loan can provide a lower interest rate and easier repayment. For example, if you have a large outstanding bill across multiple credit cards, you can apply for a personal loan from a lender.
Interest rates in the home loan market are expected to fluctuate, so it's crucial to monitor these rates. If you can get a better rate, consider refinancing your loan, which typically involves a one-time cost of 1-2% of the outstanding loan. The gain should be higher than the charges. Raj advises against refinancing loans over seven years old.

Change your lifestyle

To maintain good financial health, make lifestyle adjustments to accommodate loan repayments and pay higher EMIs. This includes cutting down on luxuries and unnecessary spending, going slow on activities like movie shows, dining out, and weekend getaways. This will help you pay off debts and maintain a stable financial situation.
To improve your credit score, consider lowering your spending limit and avoiding new loans unless they are used to prepay existing ones. Automatically debit repayment dues to your bank account to avoid missed payments and late fees, which can negatively impact your credit score.
If you're struggling with debt, don't hesitate to seek help from debt counselling centers like Disha and Abhay, or institutions like Credit Vidya and Credit Sudhaar. These centers offer free advice or charge a fee for their services, which are actively working to assist borrowers with loan repayment issues.