COVID 19 has had a major impact on economies all over the world. Pay cuts and loss of jobs seems to be the new normal. But how about the loans that you have already availed of? How do you manage them? How can you reduce the interest burden on your loans during the pandemic?
Read on to know more about the methods you can use to reduce the interest burden and make payment of EMIs affordable.
- Negotiate with Your Lender
- Balance Transfer of Loan
- Make Prepayments as and When Possible
- Replace High-Interest Loans with a Top-up Home Loan
- Increase the Tenure of Your Loan
- Increase Your EMI as Your Income Increases
Negotiate with Your Lender
During the recent few months, RBI has decreased its Repo Rate. All floating rate loans like home loans are linked to the Repo Rate. As RBI changes the Repo Rate, a similar movement is noticed in the interest rate charged on your loan.
If you have availed a loan during the earlier loan regime (linked to Base rate or Marginal Cost Linked Rate), then you may be continuing to pay a higher rate of interest on your loan. Now is the time to approach your lender to move you to a lower rate regime like the one linked to Repo Rate.
Also, if your credit score has improved since you have availed of the loan, you could approach your lender to refinance your loan at a lower rate of interest. This approach may work better if your salary/savings account is also with the same lender. It would give the lender an idea of your expenses and savings and increase the chances of refinancing your loan.
Balance Transfer of Loan
In case, you are not able to negotiate with your existing lender, the next step for you to consider is the balance transfer of your loan. This means that you transfer the outstanding balance of an existing loan to some other lender for a lower interest rate. There is always a fee involved in doing a balance transfer of your existing loan.
What helps you decide if the balance transfer is worth it? You would have to calculate the benefit that you would get by transferring your loan to a lesser rate of interest.
Even a 0.5% reduction in the rate of interest results in big savings when your remaining tenure of the loan is on the higher side (12-15 years or even more). But if you are already at the fag end of your loan, then the fee paid for the balance transfer may overweigh your savings.
A balance transfer may also be good when you have multiple unsecured loans and you have trouble keeping up with all the repayments or dealing with high-interest rates.
So, it might be good to talk to a couple of banks/Housing finance companies to see where you get the best rate. A good credit score will be highly helpful in getting a good bargain.
Make Prepayments as and When Possible
If you have availed a high-ticket loan like a home loan, you end up paying an amount equal to your principal amount as interest. You would realize that a huge sum of money is paid as interest.
Prepayment comes as the savior here! Any pre-payments made on a loan goes to reduce the principal amount of your loan. As your principal amount reduces, so does your interest burden.
Wondering how to cough up money for prepayment from your already tightly stretched budget?
It’s quite simple, all you need to do is a few conscious attempts to do it. Your year-end or Diwali bonus, a tax refund, sale of mutual funds or shares, or any one-time receipt can go into your prepayment. Or you could also keep a separate account where you put in a fixed amount which could go into prepayment of your loan at the end of the year.
Make prepayments on smaller loans like personal loans as soon as you finish the mandatory waiting period.
If you are in financial hardship due to the pandemic, you may think of making the pre-payments as soon as your situation is stable again.
Replace High-Interest Loans with a Top-up Home Loan
Unpaid credit card outstanding and personal loans are unsecured borrowings. Due to the nature of the borrowing, they carry a higher rate of interest. Credit card outstanding amount carries the highest rate of interest, as high as 36-48% p.a. Personal loans also carry a higher rate of interest which can range between 10-25%.
If you have any of these loans and a home loan, it makes sense to close these high-interest bearing loans with a top-up home loan. A top-up home loan comes at the same interest rate as your home loan.
Then, using the amount saved from personal loan EMI, try to repay the home loan faster so that you can save reduce your interest burden.
Even if you do not have a home loan, an instant personal loan can help you close some of the other high-interest borrowings like a credit card outstanding or a loan availed from the unorganized sector.
Increase the Tenure of Your Loan
Considering the current day scenario, paying your EMIs may prove difficult. So approaching your lender for an extension of the tenure of your loan may be a good idea. When you increase the tenure of your loan, the EMIs decrease. You must be wondering how would this be a helpful option as the overall interest paid on the loan will increase.
This strategy will work this way – for now, you end up paying lesser EMIs which may come across as a relief if you are facing a pay cut or loss of income. And as and when your situation improves, start investing the difference amount or even anything higher in mutual funds. As the amount accumulates over a period of time, you can either pre-pay your loan with the amount. Even if you do not prepay your loan, you would end up with an amount higher than the amount paid as extra interest.
This option will work well when there is a significant difference between your home loan interest rate and the expected return on your investment.
Increase Your EMI as Your Income Increases
When you avail of a loan, your EMI is calculated based on the interest rate, amount of the loan, and the tenure. But, don’t be under the impression that you would need to only pay that EMI through the tenure of the loan.
As and when your income permits, keep increasing your EMI. Doing this would help you clear off your loan much earlier, resulting in a lower interest burden. Increasing your loan EMI even by Rs 1000 every year can help you pay off your home loan earlier.
Make use of these strategies and pay off your loan at the earliest. As a rule, always go in for those loans that can be repaid.