Learn to Reduce the personal loan burden on Your wallet

5 MinsDec 03, 2020

Nirali Khanna, 27, is caught in a bind. Just before the lockdown, she had taken a personal loan to repair her home. Midway through the repair work, her mother contracted the virus, and Nirali had to spend a lot of money on the medical expenses. Since the repairs had stopped anyway, Nirali utilized the money for her mother’s treatment. Her mother is fine now and Nirali is thinking of taking another loan to complete the house repair. How can she manage two loans simultaneously? What can she do to ensure that her debt does not spiral out of control?

Nirali can use two methods to pay off her loans.

1. The Snowball Method: The snowball method of payments is paying off the smallest loan first regardless of the interest rate. What this does is reduce the number of loans a borrower has to repay and gives the borrower a psychological boost. Think of the time when you were in school and had to answer a 50-mark paper. There would be six brief questions worth five marks each and one question worth 20 marks, which required detailed analysis. When you tackled the smaller questions, you felt a sense of accomplishment and were able to answer the detailed question with more confidence. This is how the snowball method works. Besides once the smaller loan is repaid, money is freed up from that loan payment, and it can be used to pay off the bigger loans faster.

2. The Stack Method: In this method, the borrower will pay off the most expensive loan first. This is the loan with the highest interest rate. With this loan repaid, Nirali can use the money saved on the interest to pay off the other loans.

[Also Read: How a Personal Loan can help in debt consolidation]

Is there anything else Nirali should do to make her life easier?

Yes, there are a few other things Nirali can do to avoid getting caught in a debt spiral.

1. Never miss an EMI: This is a strict no-no. If because of circumstances, Nirali is unable to meet her EMI commitment, she should contact her lender and inform them in advance. In such a situation, lenders might make exceptions. But if you skip EMIs, you have to bear penalty charges as well as interest on interest for the number of days you don't make the payment. What's worse, your credit score also takes a hit.

2. Consolidate all loans into one single loan: This is called Debt Consolidation. Since Nirali has multiple loans going on, she can total up the amount she has to repay, approach a lender and take one personal loan to pay off all her pending loans. If possible she can try and negotiate for a lower interest rate on the debt consolidation loan. This way, she will have just one EMI to pay. She can also take a longer tenure loan, say 3-5 years. This will lower her EMI, making it easy to manage her cashflows.

3. Use the debt consolidation loan only for the intended purpose: With the money in the bank, it is easy to get tempted to splurge on something. Nirali should resist such temptations and be disciplined enough to use the loan for its intended purpose.

4. Use windfall gains to make pre-payments: If Nirali gets a bonus or a salary hike in the future, she should immediately use the extra amount to pay off as much of the loan she can. This will reduce personal loan tenure and will ease the pressure on Nirali’s wallet.

5. Do not take any more debt: Nirali should not take any more loans till her circumstances improve. This includes credit card debt or another personal loan, no matter how compelling the reason is.

6. Be frugal: Nirali should look at all her expenses and try and cut down on the non-essential ones. This may mean not buying the latest gizmos for a couple of years or that pretty dress she liked. She will have enough time to splurge once she gets out of her current financial bind.