Planning to get a loan during festivals? Know how you can manage IMEs to save more, avoid the debt trap
It is easy to get loans these days. If you have a regular income and a good credit rating, getting a loan with very small to even large banknotes won’t be a big deal. You can get the money into your account in minutes from a digital lender.
During the current festival season, a large number of people are considering getting personal loans for various needs like weddings, studies, medical bills, etc. In fact, a survey of 1,400 respondents by IndiaLends and Innovation Cell of IIM Kozhikode recently revealed that 65% of them planned to take out a personal loan before the festival season. The survey found that around 81% of Millennials between the ages of 25-35 plan to apply for a personal loan in the immediate future, mostly for education purposes, followed by debt consolidation, marriage, and more.
Personal or other loans can be repaid in IMEs. While it is easy to get loans these days, it is also important to understand how you can save more while paying off IMEs.
Experts suggest that you can end up saving money if you strategically plan to pay off your IMEs. They say that effective management of EMIs is an integral step towards long-term financial freedom.
Know what to prioritize
Pranjal Kamra, CEO of Finology, says the key to strategic management of EMIs is knowing what to prioritize first.
“As per the Avalanche strategy, in addition to your monthly repayments, you can also try to pay off higher interest rate loans like credit cards etc. your schedule. It can help you save interest charges and get debt free faster, ”Kamra said.
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“Consolidating multiple loans into one can help better manage EMIs and save money on EMIs. One can also opt for a restructuring of the loan according to the repayment capacity or transfer the balance to other banks which charge lower rates. However, living your life entirely in debt can be overwhelming, both financially and mentally. So the rule of thumb is not to let IMEs finance luxuries that you don’t need / can’t afford yet, ”he added.
Prepayment in part or in full
Anil Pinapala, CEO and founder of Vivifi India Finance, suggests that one should consider prepaying loans in part or in full when he has additional cash on hand. But you should only do this when there is no prepayment penalty on your loan.
“It all depends on how you plan your personal finances. The key to having a good credit rating is making your payments on time, which is essential for all of your future loan needs as well as keeping interest rates low. It goes without saying that late payments or missed payments lead to an additional financial burden, including late fees, penal interest, etc., which again increases payment charges, ”Pinapala said.
“A smart thing would be to consider prepaying loans in part or in full when borrowers have access to additional liquidity, but not without ensuring that there are no prepayment penalties or negotiate waiver / reduced penalties for early repayment, ”he added.
According to Abhishek Soni, CEO and co-founder of Upwards, there are two main strategies for saving money while paying off your loans:
- Repay / Seize Your Highest Interest Rate Loans First: As the name suggests, these loans will save you the maximum amount of interest charges and gradually reduce your debt load. The caveat here is that the higher interest rate loans will be of a smaller amount / shorter tenure and therefore the absolute savings might not be large.
- Repay / Seize Your Largest Loans First: While some of your larger loans may have a lower rate, the absolute cash outflow on interest charges may be higher here (given the amount higher and longer duration of these loans), so trying to pay off such loans first would be more beneficial.
“The actual choice between the two approaches above will often be hybrid and will be based on your personal free cash flow which you can pay back to IMEs. You have to calculate the absolute outflow of interest charges per loan, then plan to pay off the loans with the highest interest charges first, which is your free cash flow, ”Soni said.