Many individuals find it difficult to manage their finances after borrowing credit through loans. Balancing household expenditure and paying off the loan may become a cumbersome task if finances are not managed well. The key is to maintain the perfect balance between loan repayments and other expenses. Doing so will help you manage your finances conveniently.
The following five tips may help you avoid the financial strain associated with loan repayments.
- Stick to your budget
It is important to stick to your budget. Do not borrow an amount that will adversely affect your finances. Analyze how much you are able to afford every month and borrow accordingly. Borrowing a high amount leads to higher Equated Monthly Installments (EMIs). This may affect your finances as most of your income will have to be spent towards loan repayment. Ideally, you may utilize 35% to 45% of your income for EMI payments and use the rest for savings and meeting daily expenses.
- Save a part of your income
Saving provides a safety net in case of any emergency. Savings are a huge help for many purposes, during retirement, funding child’s education, meeting unforeseen medical expenses, besides others. Moreover, you may utilize the savings to purchase a luxurious commodity like a car, house, real estate, or any high-end electronic gadget. You may also use this money to make investments in various instruments like bonds, fixed deposits, unit linked insurance plans (ULIPs), besides others.
- Manage your debt well
If your financial position is not strong, avoid availing of multiple personal loans at the same time. This not only affects your repayment ability but also impacts your credit score negatively. Numerous applications indicate financial risk. If you are in dire need of finance for personal use, you may consolidate all existing loans into one loan. By obtaining a relatively lower rate of interest for this consolidated loan, you will be able to make significant savings.
- Try repaying the loan quickly
Make an advanced payment towards the loan if your financial position allows you to do so. In case you get a salary raise, you may use the extra income to make a prepayment. Additionally, you may also make advanced payment in case of a surge in income or through a sale of an asset like property. Prepayment reduces the outstanding loan amount, thereby reducing the loan tenure. Therefore, try making advanced payments so as to clear off the debt as quickly as possible.
- Transfer the loan
You may sometimes find a lender offering a lower rate of interest as compared to your existing lender. In such a case, you may transfer the loan. Even if the interest rate differs slightly, it helps to make significant savings if the loan amount is huge.
Availing of a personal loan is a big responsibility. Hence, it is important to learn how to manage your debt smartly. Use the aforementioned tips to avoid any kind of financial strain in the long run.
