Everyone takes a loan at least once in their life to fulfill their dreams or needs. It might be a car loan, home loan, or just about any other loan that satisfies your financial needs at a particular point in time, like your credit card.
But, if you have watched the movie ‘Confessions of a Shopaholic’, you’ll know what happens when you live beyond your means. Lured by high-end fashion, the film’s protagonist – Rebecca – keeps borrowing until she pushes herself to the brink of a financial disaster. Well, the movie may have had a happy ending, as most movies go, but in reality, you may not be as lucky as Rebecca was.
So, if you too are in the habit of borrowing to meet your goals, sit back and think – are you able to repay your debts comfortably?
Here are 7 tips to help you manage your personal loans diligently:
1. Repay high-interest loans first
Make a list of your debts according to the interest rates. A Home loan or student loan is likely to have lower interest rates while offering tax benefits. Credit card debts, on the other hand, tend to come with slightly higher rates of interest. It is, therefore, a good idea to pay these before moving on to ‘safer’ ones.
2. Consolidate your loans
Consolidating loans is a good idea when there are many loans. Paying off many loans through one single loan and repaying that loan will reduce the financial strain. For example, let’s assume you have paid off your home loan. But you have other personal loans, along with high credit card bills. To reduce the burden, look at taking a loan against the property you now own and pay off the high-interest debts.
3. Know your credit score:
Keep a close watch on your credit score while repaying a personal loan. The way you manage your loans will be reflected in your credit score. Sticking to your monthly installment plan or even getting ahead of it will improve your credit score. Falling behind on your payments, on the other hand, will lower your credit score.
4. Create a payment schedule:
When repaying loans, it is useful to set an alert for every payment on your smartphone or computer. Late payments incur late fees, and if you miss multiple payments, your credit score will be affected. Save your payment dates on your smartphone and set an alert to remind you at least three or four days before the payment. In case, you miss the payment, don’t wait till the next due date, pay the outstanding as soon as you remember or as soon as you garner the necessary funds.
5. Follow a budget
Budgeting can go a long way toward successfully managing personal loans. Trying to manage your loan without a budget puts you in a position of vulnerability and confusion—you don’t always know where your money is going or how much of it is going there. If you find yourself afraid to check your bank account, having less money than you know you should, or are unsure of areas where you’re overspending, then creating a budget might be the answer.
6. Request a lower interest rate
If you’re an old and established customer of the lender and have a good credit score, try to negotiate for a lower interest rate. You might get lucky. You can also transfer your loan to another financial institution that charges a lower interest rate than the current bank.
7. Got a bonus? Make a prepayment
It is tempting to splurge on a lifestyle purchase when you receive an unexpected bonus or investment return. But if you’re under a pile of debt, it would be more practical to dig your way out of it first. Any windfall should ideally go towards debt repayment. Closing loans faster or paying more than the stipulated Equated Monthly Installments (EMI) will reduce the tenure of the loan and lessen the interest payments.
Loans are serious financial commitments and should be taken up only when you are confident that you can manage them alongside other expenses. Managing a personal loan can be a straightforward and stress-free process once you’ve worked out the kinks involved. Being disciplined with your finances, setting a well-thought-out budget, and getting ahead on your loan whenever you can will place you ahead of the curve and make managing your loan as easy as 1-2-3.
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