Do you have a sanctioned loan? 5 tips to manage it intelligently

Prepaying a loan can save you a lot of money on interest charges, especially if you do it during the early years of the loan.

A loan can help you bridge financial gaps and achieve goals that cannot be achieved with our own resources. However, having a loan comes with a repayment commitment, the failure of which can have a negative impact on your financial well-being.

Following these five simple tips can help you manage your loan burden:

1. Avoid irregularities in EMI payments

Timely repayment of loan IMEs and credit card dues receives the highest weight among all the factors that credit bureaus consider when calculating your credit score. Therefore, develop the habit of paying off IMEs before their due date. Failure to pay contributions on time can result in high fees and a relatively higher interest rate. On top of that, failing to repay IMEs on time can also negatively impact your credit score and your prospects for loan and credit card eligibility.

2. Include loan EMIs in the emergency fund

The main goal of creating and maintaining an adequate emergency fund is to deal with unforeseen financial demands like sudden job loss, serious illness, disability or other adverse events. Ideally, the size of our emergency fund should equal at least six months of unavoidable monthly expenses, including rent, insurance premiums, IMEs, etc.

Having adequate emergency funds would make it easier for you to continue repaying EMIs in the event of financial demands, and thus avoid incurring late penalties, higher interest charges, or negatively impacting your score. credit.

3. Opt for balance transfer whenever possible

The balance transfer option allows you to transfer your existing loan to other lenders at a lower interest rate. This helps to reduce the overall cost of interest and EMI burden. Existing borrowers with a large remaining loan term should compare the interest rate charged on their loan with those granted by other lenders. The best way to do this is to visit online financial market places. These platforms retrieve loan offers available from various lenders based on your credit score, monthly income, job profile, employer profile, and other facets of your credit profile.

Try to negotiate with your existing lender to reduce interest charges, in case the interest rate offered by other lenders results in significant savings on the overall interest cost of your existing loan. Go with the balance transfer option if your current lender refuses to lower the rate.

Also, before exercising the balance transfer option, be sure to take into account any applicable prepayment charges, if any, taken by your existing lender, as well as the processing fees and other associated fees taken. by the new lender. Only use the balance transfer option if the overall savings on interest charges far outweigh the associated costs.

4. Prepay the loan early when you have excess funds

Prepaying a loan can save you a lot of money on interest charges, especially if you do it during the early years of the loan. Try to prepay the loan whenever you have excess funds. If you are managing multiple loans, try to prepay the loan with a higher interest rate first.

Before you prepay a loan, be sure to factor in any applicable prepayment charges (if any). Although the RBI prohibits lenders from charging prepayment charges on variable rate loans, they are free to charge prepayment charges on fixed rate loans. Only use the prepayment option if the savings on the overall interest cost significantly exceed the charges levied on the prepayment of the loan, if any.

You should also refrain from prepaying or blocking a loan using your emergency fund or investments intended for critical financial purposes. This may require you to resort to more expensive loans to meet financial demands or to meet those crucial financial goals.

5. Periodically review your credit report

The credit report summarizes your loan and credit card activities, as reported by lenders and credit card issuers. Credit bureaus calculate your credit score based on information entered on your credit report. So, any mistake on the part of the lender or the bureau or even fraudulent activity in your credit accounts can have a negative impact on your credit score. The only way to mitigate this risk is to get your credit report out at regular intervals.

Frequent review of your credit report, ideally at least once every three months, can help you access personalized and pre-approved loans, balance transfer offers and credit cards depending on your situation. credit profile.

(By Gaurav Aggarwal, Senior Director, Paisabazaar.com)

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