How to Reduce your Loan EMI Burden?

Today getting a loan has become so easier that you can get your loan approved within a few hours of making applications. This hassle-free process of taking loans has, on one hand, made our life easier but on the other hand, taking unplanned loans has put many people in the vicious circle of EMI (Equated Monthly Instalments).

Even the person having well-paid jobs or having multiple earning members in the family could not manage the finances well and ends up entangled between expenses, savings and loans. This results in extended tenures of loans, a higher rate of interest or penalty on the dues and harassment by lenders due to default in EMIs. People having multiple loans are affected the most and even a single missed EMI may put a black-dot in their credit report aka CIBIL score which jeopardises their chances of availing any loans in future. If you are finding difficult to repay your loans, then you may need to rework on your approach. Following are the ways through which you can manage your loans and reduce your loan burden.

A Small Reminder: EMI to your Salary Ratio shall be between 40% to 50% i.e. not more than 50% of your salary should be used to pay off your loan EMI.

Ways to Reduce your Loan Burden With Lesser Efforts

Repay high interest bearing loan first

The first step is to list down the various outstanding loans with the interest rates. Now identify the loan which has the highest interest rate and needs to be paid off first, such as personal loan, credit card dues etc.  This step reduces the interest outgo in future.

For example you have currently three types of outstanding loans i.e. Home Loan of ₹ 15 lakhs bearing interest rate of 9% p.a. for 20 years, vehicle loan of ₹ 5 lakhs bearing interest rate of 11% p.a. for 7 years and personal loan of ₹ 7 lakhs for 5 years bearing interest rate of 14% p.a.

Total EMI for all loans comes to ₹ 40,063 and total interest outgo on the loans amount to ₹ 17,34,929. Now if you increase the EMI to ₹ 43,000 i.e. by ₹ 2,937 per month to pay the highest interest bearing loan i.e. personal loan. The reduction would be

A small increment in the EMI reduces the total interest outgo of ₹ 60,624 and tenure by 1 year. The normal tendency or thinking of the borrower is to pay off the smaller loan first and then move on to the next loan, however, the approach should be to pay off the highest interest-bearing loan first and then move on to second highest interest rate bearing loan and so on.

Step up EMI

The second step to reduce your loan burden is to simply increase the EMI amount as your salary increases. Suppose if you get a hike of 10% from your employer you should at least hike your EMI by 5% to 7%. The ratio of your EMI to your salary should remain in between 40% to 50% i.e. up to half of your salary shall be used to repay your loans. Suppose you get an increment of 10% on your salary of ₹ 1 lakhs per month now if you increase your home loan EMI by ₹ 1,500 per month the total tenure gets reduced to 10 years and the future interest outflow would reduce by ₹ 2,35,527. Similarly, regular increment in the EMI with the salary hike would result in astronomical changes in the loan tenure as well as in the future interest outflow.

Use windfall gains to repay the loan

Usually, bonuses or incentives comes at the end of the financial year. Use this bonus to prepay your debt rather than using it on futile things such as buying expensive gadgets, clothing, apparels etc. Apart from bonuses, there are several other windfall gains such as maturity proceed of life insurance policy, redemption from mutual funds, sale proceeds from assets, income tax refunds etc. must be used to prepay the loans. As said earlier the highest interest bearing irrespective of the outstanding amount of loan should be attacked first.

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Convert Credit Card Dues to EMI

The credit card provides an interest-free credit for up to 55 days. But in case you are reckless and shopaholic person, a credit card can put a severe dent to your finances. If you are unable to pay your debt and regularly roll-over the credit card dues by paying minimum dues then a hefty interest at the rate of 3% to 3.60% per month is charged on the outstanding amount. This adds up to 36% to 44% in a year over the outstanding balances.

Under this situation, you should ask your credit card company to first reduce your credit limit and then convert the outstanding amount into the EMIs which gives your much-needed cushion. The companies may give EMIs for a period of 24 months. Apart from this, you can also go for personal loans which cost nearly half of the interest on the credit card to realign your finances.

Read 5 Ways to Keep From Drowning in Credit Card Debt

Use Existing investment to prepay the loan

In case you are not able to manage debts and on the verge of making defaults. It is better to use your existing investment to rebalance your finances. If your investments are in the schemes where no premature withdrawals are allowed, then borrow funds against your investment such as life insurance policies, PPF, NPS etc. For example, if you take loan against PPF then the interest rate would be 2% higher than the prevailing interest rates on PPF, which would be far better than personal loans or cast a slur upon your CIBIL score.

You can also use your Gold holdings to put to use in this situation. You can borrow funds by mortgaging or even sell them if you have some serious trouble. This should be the last resort to tackle your drowning situation.

Consolidate your loans and refinance

There have been occasions where a person takes several loans for various needs such as multiple personal loans. The idea behind the consolidation of your loans is to reduce the interest rates as well managing one loan is far better than managing various loans such as you tend to miss paying EMI if you have several loans running altogether, however, if you have a single loan then chances are almost negligible to miss EMI. Further, in case, you have multiple credit card dues and personal loans than getting a single home loan or loan against property would reduce the interest cost to half but also provides a cushion of single EMI.

You can also go for refinancing if the same type of loans is available at the lower interest rates but keep in mind that there would be processing fees, the survey fee, stamp duty etc. So there must be at least 1% difference if you are planning to switch the lender.

Save money by using Tax-Benefits

The government keeps cheering the common man by bringing various tax sops under the Union Budget. These tax sops provide the much-needed savings to a common man. There are multiple tax benefits which one can use and save tax such as deduction of interest and principal repayment or even renovation of the house, tax exemption on the treatment of your parents, interest on higher education loans, child tuition fees etc. These tax-savings options should be used to the fullest and money saved through these can be used to repay the debt.

Read What is Standard Deduction in India?

Make Budget and assess the deviation

Start Making monthly budget covering all your necessary expense including groceries, education and medical bills. Try to curtail your expenses and list out things which are necessary. Avoid outing on a regular basis, unnecessary shopping and long expensive trips. But making a budget is not enough, you need to abide by it and identify the deviations and rework the same on next budget till you start adhering to it. If your wife is making a hole in your wallet, talk to her and make her understand the financial troubles you are going through. The money saved through this practice should be kept aside for a few months to pay off some part of your debts. Make this a regular habit and you will see wonders in a year or two.

Motivate your spouse to support financially

Living in a metro city is a costly affair and both husband and wife need to contribute to live a healthy-wealthy life. If only one of the spouses is earning then sometimes it becomes hard to cope up with the living standard and then the loan starts getting piled up. So rather than going for loans, talk to your spouse and motivate her to start working, even taking tuitions at home or blogging or any other hobby will bring some financial support.

A small contribution from her side makes a big difference going forward as we have seen above in the small increment in the EMI per month. So, earning small does not matter, but what matters is earning.