Are you planning a loan for festivals? Learn how to manage EMIs to save more and avoid the debt trap
It is easy to get credit these days. If you have a steady income and good credit, getting loan on very small to large lot sizes isn’t a big problem. You can have money in your account from a digital lender in minutes.
In the current festival season, a large number of individuals are planning to take out personal loans for various needs such as weddings, education, medical expenses, etc. 65% of them are planning to take out personal loans before the festival season. The survey found that around 81% of millennials in the 25-35 age group plan to apply for a personal loan primarily for educational purposes in the near future, followed by debt consolidation, wedding, etc.
Personal or other loans can be repaid in EMIs. While getting credit is easy these days, understanding how you can save more while paying back EMIs is also important.
Experts suggest that strategically planning to repay your EMIs can save you money in the end. They say that effectively managing EMI is an essential step towards financial freedom in the long run.
Know what to prioritize
Finology CEO Pranjal Kamra says the key to strategic EMI management is knowing what to prioritize first.
âAccording to the avalanche strategy, in addition to your monthly repayments, you can also try to schedule higher-interest loans such as credit cards, etc. This can help you save some interest costs and get out of debt faster, âsaid Kamra.
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âConsolidating multiple loans into a single one can help improve EMI management and save money on EMIs. You can also choose to restructure the loan according to its ability to repay or transfer the credit to other banks that charge lower interest rates. Living life entirely on debt, however, can be both financially and psychologically stressful. So the rule of thumb is not to let EMIs fund the luxuries that you don’t need / can’t afford yet, âhe added.
Pay in part or in full in advance
Anil Pinapala, CEO and Founder of Vivifi India Finance, suggests repaying part or all of loans early if he / she has extra cash available. However, you should only do this if there is no prepayment penalty on your loan.
âIt all depends on how you plan your personal finances. The key to healthy creditworthiness is repayment on time, which in turn is critical to your future credit needs as well as low interest rates. Of course, late payments or missed payments create additional financial burdens, including late fees, penalty interest, etc., which again add to the payment burdens, âPinapala said.
“A wise thing would be to consider prepaying loans in full or in part if borrowers have access to additional cash, but not without ensuring there are no prepayment penalties or negotiating a waiver / lower prepayment penalty,” added he added.
According to Abhishek Soni, CEO and Co-Founder of Upwards, there are two main strategies you can use to save money when you repay your loans:
- First, pay off / complete your loans with the highest interest rate: As the name suggests, with these loans you can save the maximum interest costs and gradually reduce your debt burden. The caveat here is that the loans with the highest interest rate have a smaller amount / term and therefore the absolute saving may not be much.
- Pay off / close your largest loans first: while some of your larger loans may come at a lower interest rate, the absolute cash outflow on interest cost could be higher here (given the larger amount and longer duration of such loans) so you are trying to pay – of such loans first would be more beneficial.
âThe actual choice between the above two approaches will often be mixed and based on your personal free cash flows that you can withdraw for EMIs. You should calculate the absolute interest cost outflow per loan and then plan to first pay off the loans with the highest interest cost that match your free cash flows, âSoni said.