How to optimally manage my loans
The process of availing a loan has evolved significantly in the past few years, with easy and digital processes available that not only enable quicker disbursal but provides convenience for borrowers. Today, availing loans is not restricted to just financing big-ticket expenses like buying a house or a car or funding children’s education. As a result, the number of people availing loans are increasing. People are burdened with multiple EMIs at wide-ranging rates with very little to spare for investments and their overall financial security and saving capacity is reducing
If you are in a similar situation, the best way to overcome it, is to consolidate your existing debts into a single loan at a low-interest rate, reduced tenure and other favourable terms and conditions.
Step 1: Figure out the amount you need
As a first step, find out your total outstanding debt and then, subtract from it the amount that you can arrange by redeeming your existing investments. Prefer low-yield investments like bank fixed deposits or debt funds for this purpose as their rate of returns are likely to be lower than the loan rates.
Step 2: Find the credit options
Once you know the loan amount, it’s time to find out the best loan type based on their interest rates, tenure, etc. Here are your options:
Personal loan: The fast disbursal process, affordable interest rates and flexible tenures of personal loans make them the most popular debt consolidation instrument, especially among credit card holders. Lenders charge anywhere from 11% – 24% p.a., depending on your income, credit score and employer. Their tenures can go up to 5 years while the disbursal is usually completed within seven days. Existing personal loan borrowers can also try the personal loan balance transfer option to transfer their loan to another lender at lower interest rate, longer tenure while availing extra funds to pay off other costlier debts.
Loan against property: Loan against property (LAP) is granted against the mortgage of residential and commercial properties. Their interest rates can be as low as 9.4% p.a. while the loan tenure can go up to 15 years. The loan amount too can be as high as Rs 7.5 crore, usually ranging between 50 to 65% of your property value. Your age and repayment capacity too would be considered while sanctioning your loan amount. Thus, for those who own a property but don’t have an existing home loan, LAP would be the best debt consolidation option considering their long tenure, low-interest rates and higher loan amount.
Top-up loan: A top-up loan is offered to existing home loan borrowers only. Although their lending rates are usually 100 bps higher than home loan rates, some lenders charge the same interest rates as home loans. This makes them probably the cheapest credit option for existing home loan borrowers. The loan amount can go up to Rs 15 lakh depending on your repayment capacity and property value while the loan tenure can go up to 20 years depending on the residual tenure of your original home loan.
Loan against securities: Loan against securities is an overdraft facility set against the value of your securities. Lenders lend up to 50% of the value of your securities depending on their type. Interest rates usually range of 10- 11% p.a. on the amount drawn. It is suitable for those with sizeable long-term investments in the form of shares, equity mutual funds, insurance policies, etc. as they can utilise them for low-cost funds without compromising their long-term goal.
Step 4: Check your credit report before making loan application
Lenders usually consider credit scores of 750 and above as good ones. Checking your credit report before making the loan application will allow you to know your current credit score, detect errors or frauds in your credit report and take required corrective actions. Fetching your credit report from online lending marketplaces and credit bureaus will also help in getting customised loan offers through them based on your credit score. Compare all loan options available to you from a lending marketplace to get the best deal.
Step 5: Prioritise prepayments of older loans
Once you have availed the new loan, prefer paying off unsecured loans like personal loans, loan against credit card, etc. before paying secured ones like home loans, car loans, etc. Unsecured loans not only have higher interest rates, prepaying them off first will improve your credit mix, i.e. ratio of secured and unsecured loans, which will improve your credit score.
Step 6: Ensure regular repayment of new loan
After replacing your older loans with a new loan, ensure its regular repayment to avoid penalties and conserve your credit score. If required, set a standing instruction in your primary savings account to automatically deduct the EMI on a pre-specified date.
What are the different options to optimally manage my loans?
Here are a few tips to keep your debt under control and ways to speed up the process of reducing your debt load.
Keep tabs on your credit.
Anyone who borrows money should keep an eye on their credit. But interestingly, there are quite a good number of people who aren’t even aware of their credit score. Do you know what your credit report says about your debt habits? If you’ve got loans and many accounts you’re dealing with, you’ll need to know how your debt load affects your credit rating.
Do your own debt management.
Before you seek credit counselling or turn to debt settlement companies, do all that you can to handle your debt issues on your own. Handling things on your own is cheaper. A lot of it is simply applying fiscal discipline: start off by avoiding new debt. Don’t take on additional debt unless you are comfortable with what you’re already dealing with.
Lower your interest rates.
Find out if you can somehow reduce your loan rates. Can you qualify for low interest credit cards? Or you may think about taking out a cheaper personal loan to pay off a more expensive loan.
Pay on time!
You know you’re in trouble if you’re unable to make your loan payments on time: this indicates that you’ve taken too heavy a load and that you should make it a priority to address this debt. Do your best to cut down on expenses, while paying on time.
Pay more than what’s required each month.
If you ever get a hold of a windfall or find yourself with extra income, you should think about applying it towards your debt.
What are good and bad loans?
Good Loans
Good loan helps you generate income and increases you net worth. Here are four notable things that are worth going into loan for:
Technical or College Education
In general, the more education an individual has, the greater that person’s earning potential. Education also has a positive correlation with the ability to find employment. An investment in a technical or college degree is likely to pay for itself within just a few years.
Small Business Ownership
Making money is the whole point to starting a small business. Earning income is a primary benefit of entrepreneurship, with being your own boss also a positive result of the endeavour.
Real Estate
There are a variety of ways to make money in real estate. Residential real estate can also be used to generate income, by taking in a boarder or renting out the entire residence.
Investing
Short-term investing provides an opportunity to generate income, and long-term investing may be the best opportunity most people have to generate wealth.
Bad Loans
Certain loans are downright bad. Items that fit into this category include all loans incurred to purchase depreciating assets.
Cars
Vehicles are expensive. New cars, cost a lot of money. While you may need a vehicle to get yourself to work and to run the errands that make up everyday life, paying interest on a car purchase is simply a waste of money.
Clothes, Consumables and Other Goods and Services
It’s often said that clothes are worth less than half of what consumers pay to purchase them. Every penny spent in interest on these items is money that could have been used more wisely elsewhere.
Credit Cards
Credit cards are one of the worst forms of bad debt. The interest rates charged are often significantly higher than the rates on consumer loans.
Anoop Nair
Dilzer Consultants Pvt Ltd
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