How to manage loan Repayment

If you also find it difficult to repay your loans, here are some strategies that can help you manage your debt situation without stressing your wallet.

1. Repay high interest loans first. ...
2. Increase repayments with rise in income. ...
3. Use windfall gains to repay costly debt. ...
4. Convert card dues to EMIs. ...
5. Use investments to repay debt.

Borrowers typically have horror stories to tell about loan tenures that have been extended till retirement, credit cards charging astronomical amounts and harassment by lenders due to missed EMIs. If you also find it difficult to repay your loans, here are some strategies that can help you manage your debt situation without stressing your wallet.

Repay high interest loans first

As a first step, make a list of all outstanding loans and then identify the ones that need to be tackled first. Ideally, start by repaying the costliest loan, such as credit cards and personal loans. Pay the maximum amount you can afford against the high-cost loan without jeopardising the repayment of the other loans. Once you have cleared the costly debt, move to the next one. Also known as the 'debt avalanche', this strategy minimises the total interest paid on all loans. But this repayment should not be at the cost of the regular EMIs on other loans. Those must continue as well.

While prioritising repayments, also consider the tax benefits on some loans. For instance, the interest paid on an education loan is fully tax deductible. If you factor in the tax benefits in the 30% tax slab, an education loan that charges 12% effectively costs 8.5%. Similarly, tax benefits bring down the actual cost of a home loan.

Increase repayments with rise in income

One simple way to repay your loans faster is to bump up the EMI with every rise in your income. Assuming that a borrower gets an 8% raise, he can easily increase his EMIs by 5%. The EMI for a 20-year home loan of `20 lakh at 11% rate of interest comes to `20,644. The borrower should increase it by around `1,000 every year. Don't underestimate the impact of this modest increase. Even a 5% increase in EMI ends the 20-year loan in just 12 years (see table). It helps the borrower save almost `12 lakh in interest.

Continue.......