If there’s one thing that keeps most people from attaining as well as maintaining prime financial health, it’s debt. Whether it has to do with Credit Card overspending or taking on too many loans, debt is something that needs to be tackled as quickly and as efficiently as possible.
To drive home this particular point, let’s take a look at Rohan, a Bangalore based IT engineer. Rohan, like many of his peers, had a high-paying job, but always seemed to find himself scrambling for funds at the end of every month.
He had taken out a Home Loan a few years ago along with a Car Loan to purchase two cars for both himself and his wife. In addition, he had also taken out a Personal Loan to pay for his child’s primary education. Coupled with his day to day expenses and his penchant for swiping his Credit Card at the drop of a hat, he found that his debt burden was rising to unmanageable levels.
If you happen to find yourself in a similar situation to Rohan, remember that it isn’t unusual to have multiple loans. However, it is important that you understand your limitations and budget yourself so that you can comfortably make repayments towards these loans on a monthly basis.
Additional Reading: The Do’s And Don’ts Of Budgeting
If you are unable to make regular payments towards your loans you could find yourself in a bit of a financial pickle. And that’s putting it mildly. Ideally, the total of your loan repayments and Credit Card debts should be no more than 40% – 50% of your take-home pay. This way you can ensure that you have enough money to take care of your essential expenses, while also ensuring that you have money that you can divert towards investments or tuck away as savings.
While there is no magic formula to get rid of a massive debt burden, you can certainly adopt a disciplined and planned approach towards paying off your most cumbersome loans one at a time in order to improve your financial situation.
Let’s take a look at the top three loans that you should be looking to close out as soon as you can to ensure that you stay financially healthy in the long run.
Credit Card Loans
A Credit Card Loan is arguably the most expensive kind of loan that you can take. Borrowing cash against your Credit Card should be your last resort if you are looking for funds. This is because interest rates for these loans could range anywhere between 22% and 36%.
The same goes for huge balances that you may have piled up on your Credit Cards. Paying only the minimum due on your card could be pretty dangerous.
For example, if you take a Credit Card loan for Rs. 1 lakh for 2 years, you will be paying Rs. 1.24 lakh in interest at an interest rate of 24% p.a. This, of course, is in addition to the principal of Rs. 1 lakh that you will be repaying. Hopefully, this should convince you that you need to close this loan as quickly as possible.
Additional Reading: 5 Things To Know About Credit Card Loans
Personal Loans
Personal Loans can be a literal financial godsend in times of need. Getting a Personal Loan is easy in this day and age, and the best part about a Personal Loan is that the money can be used for any legitimate purpose.
However, Personal Loans come with an average interest rate that ranges anywhere between 16% and 20%, depending on your financial situation and the lender that you choose. This is why paying off your Personal Loan should always a major priority when it comes to reducing your debt burden.
Now let us assume that you have taken a Personal Loan of Rs. 3 lakhs for 5 years at 17%. Your monthly outflow for this loan would be Rs. 7,296, and pay this monthly amount until the end of the loan tenure, you are paying back Rs. 1,37,726 in interest.
Consider this: if you pay Rs. 50,000 towards closing the loan at the end of 2 years, you can save Rs. 25,632 in interest. Your loan tenure will also get reduced by 10 months. So, if you continue to hold the loan until maturity, understand that you will be paying a huge amount in interest.
While most banks and Personal Loan service providers charge a prepayment penalty ranging between 1% and 2% of your loan amount, prepaying the loan will still save you plenty in the long run.
Additional Reading: Get A Sweet Deal When Prepaying Your Personal Loan
Car Loans
Car Loans are absolutely great because they help us achieve our dream of owning a car. However, when you buy a car using a Car Loan, you are actually paying interest for a depreciating asset.
The value of your car goes down as soon as you take it home from the showroom. It depreciates with every day of use. This is why you must repay your Car Loan as soon as you can. Even though interest rates for Car Loans are much lower than that of Personal Loans, interest is a cost that you are paying in addition to your car purchase.
The more you can save on interest, the better for your financial health. Note that Car Loans may come with a prepayment penalty. So, check with your lender before taking the loan or at least before you prepay. Ideally, you should be paying off the loan in the initial years.
This is because you would have paid back half of the interest due by then. For instance, for a 5 year Car Loan of Rs. 4 lakhs with an interest rate of 12.5%, you would have paid 50% of the interest before the fourth year. The longer the tenure of your loan, the more interest you will be paying and prepayment can help reduce both the tenure as well as the interest on your loan.
Additional Reading: Drive Away With These Paperless Car Loans
Three De-cluttering Tips:
- Ensure loan repayments are not more than 50% of your monthly take-home pay.
- Look at the most expensive loans that you have and start your repayments with them.
- Say a big NO to ‘Cash Against Credit Card’. Try other options before going in for this one.
After reading this, you’ll probably be a lot wiser and more diligent with your loan repayments. Also remember, before applying for a loan, make sure you compare across lenders to get the best possible rates and terms for your loan.