Five tips to follow when planning loan repayment

2 MinsApril 20, 2020

Repaying a loan may be the last thing on your mind if you are facing any kind of financial stress. But missing an EMI or defaulting on your loan can have a long-term impact. The negative impact stays on your credit report for two to three years and can affect your chances of borrowing in the future. Hence, you must not miss a single repayment.
If you are facing a cash flow problem here are a few things to keep in mind.

loan repayment

1. Pay off expensive loans first
If you have more than one kind of debt, say credit card outstanding and personal loan and are finding it difficult to repay both simultaneously, pay off the more expensive loan first. While both are unsecured loans, the interest rates on credit cards can be as high as 40-45%, depending on the tenure. While for a personal loan the rates range between 12 and 24%. You may be tempted to pay off your personal loan as it could be of a longer duration than your credit card dues. But remember, the interest charges on credit cards can add up to a tidy sum if left unpaid.

2. Convert credit card outstanding into EMI
If you have run up a huge credit card outstanding you can convert it into an EMI and repay it monthly. In this case, the rate of interest will be lower than if you only pay the minimum amount due and carry forward the remaining outstanding. The bank will also charge you a processing fee for converting the outstanding into EMI and your credit card limit will be reduced to that extent until it is paid off in full.

3. Consolidate your debt
Taking a fresh loan to repay an existing loan may not seem like a good idea. But if your cash flow is under stress, this could be a good option. You can either transfer your credit card balance to another card which charges a lower rate. Or you could avail of a personal loan and repay your credit card loan since the interest rates on personal loans are lower.

[Also Read: Things to Know Before You Prepay Your Home Loan]

4. Compare all costs and not just interest rates
When you avail of a personal loan, check the charges on pre-payment and processing fees in addition to interest rates, as these will also add to your cost. The bank where you have your salary account may offer you a loan faster, as you may not need to undergo the verification procedure. But do compare both cost and convenience before zeroing in on the bank. For instance, Axis Bank does not charge a pre-payment penalty on personal loans.

5. Look at secured loans
You can even look at a loan against FD and other financial investments such as Debt or Equity Mutual Funds, Equity Shares, Listed Bonds, Life Insurance Policies and gold. These being secured loans, the interest rates are lower than on personal loans, in the range of 10 to 14%. Besides, you won't need to sell or redeem your investment completely. But if you need a large amount, these loans may not be suitable as the amount is restricted to a certain percentage of your investment value.

Keep track of your loan repayment by checking your credit score and report regularly. You can get one free credit report from the credit bureaus in a year. Use this facility to your advantage to maintain your track record.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.