Managing a loan requires financial discipline. Any inconsistency in paying your debts can spoil your credit score, which could impede your financial health.
If you have multiple loans, you may be at a higher risk for making these mistakes. You need to balance your EMIs along with other wants and needs. You need to repay your dues on time.
Here are some tips you should keep in mind to effectively manage multiple loans.
Keep Your Debt At A Manageable Level
First of all, all your EMIs combined need to be at a level from where they cannot harm the other financial needs you have.
BankBazaar CEO Adhil Shetty says you could follow a thumb rule. “For example, no more than 40% of your disposable income should go towards your EMIs,” says Shetty. “This is also subjective. For instance, if your income is Rs 30,000, paying 40% of that would strain your ability to manage other expenses. But if your income is Rs 200,000 and you have dependents or major liabilities, you may be able to pay off even Rs 100,000 as EMIs. The point is to find the balance.”
Keep An Eye On Your Expenses
It would be best if you kept a strict tab on your expenses so that you have the dedicated funds required to pay off your debts. Shetty says, “Make a list of expenses and prioritise them. For example, you may keep high-priority expenses like electricity bills, school fees, etc., at the top and keep the least necessary expenses at the bottom. Based on your budget, try to meet your top priority expenses first and avoid low priority expenses. This way you can save a lot of money. You can use the saved money to repay your loan early.”
Consolidation of Loans
The chances of missing out EMIs when you manage multiple loans are high. Your loan portfolio may include short-term, medium-term, and long-term borrowings, and the interest rate may also vary accordingly. Servicing several EMIs can put pressure on your financial strength. So, you may choose to consolidate your multiple loans into one or two loans. You may close existing loans like personal loans, car loans, credit card loans, etc., by using funds raised through a single big loan like a top-up home loan or loan against securities. Loan consolidation can help you save interest, allow you longer repayment tenure and help you in improving your credit score in the long term.
Timely Repay Your Loans
Whether you fail to repay one or multiple loans, the immediate repercussions are usually the same, i.e., your credit score will be negatively impacted. So, if you have multiple loans, try to repay all the loan EMIs on time. “Avoid taking a new loan to pay the existing one; it may lead you to a debt trap. If you are finding it difficult to repay multiple EMIs simultaneously, you may request your lender to extend the repayment tenure to lower the EMI size,” suggests Shetty.
Prepay Higher Interest Loans
People get some increment every year in their salary/income. This increment often goes into spending on non-essential things or buying expensive things. If you make it a habit of using the increment in your income to prepay a portion of your existing loans, it can help you close your loans much ahead of their tenure. Prefer to close such loans first, which carry a higher interest rate than other loans.
Make An Effective Debt Repayment Plan
It is advisable to pay loans with higher interest liabilities first. Pay debts with a higher interest rate, shorter repayment tenure, and zero prepayment charges. It would help if you tried to close them early compared to loans with low-interest rates and longer repayment tenure. If you can close some of your high-interest loans before the tenure, it can help you reduce your EMI load and focus on big-ticket loans more efficiently.
