Whether anyone love or hate it, these days loans are an integral part of modern life. Borrowing a loan or a credit card is not a bad thing, but to use it wisely is important. Misused or mismanaged debts can head down a long spiral and bring you down too. Different loans are like tools in a toolbox and skilled craftsman know how to use each one effectively to achieve his goal. Debts should be used at the right time for the right purpose.
Borrowing a home loan or a mortgage is a biggest commitment of life and a smartest way to convert a dream into reality without hurting your savings. But it is not very easy to handle the unexpected burden of EMI’s. Following are few tips that help you to breeze throughout the repayment process. If you have lot of debts under your belt, the following tips can help the process to control and speed up to reduce your debts.
Bring your loans together
You may think of combining few of your loans altogether to reduce the debts. You may think to transfer and paying off the over dues on time. Multiple loans with multiple banks might have different dates of EMI’s with different amounts. By consolidating the debts can help to manage the funds easily. Different loans with different EMI’s might also lead to higher outflow of the funds. The consolidation in one financial institution can provide an option to choose a lender that can provide lower rate of interest, higher tenure as well as can lower the cash outflow. This option can also provide an opportunity to get additional funds from the new lender.
Settlement companies can help you to settle your loan debts but still it is advisable to handle your debt issues on your own. It only needs one simple financial rule: start off and avoid new debts. It is not only cheaper but turn to be beneficial in future. Try to deal with what you already have instead of adding a new one. Cutting on expenses and trying to earn more can help to cover up the bills. No magic bullet can help more than what you can do on your own.
Keep an eye on credit
Never look down to test the ground before taking your next step; only he who keeps his eye fixed on the far horizon will find the right road. There are people who become careless about their credit score. Your credit report is a pure reflection of your debt habits. The debt load of loans and multiple accounts bring the ratings in bad shape. Debt management influences the credit rating and decides the eligibility for cheaper loans in future and freedom to reduce your interest rates on your loan. A healthy credit history can help you to negotiate on the interest rates and retire from your loans as soon as possible.
High EMI Payment
A slightly higher EMI ensure that you can repay your loan before the loan tenure ends. This small step significantly saves number of months or years from the loan tenure. A home loan or a mortgage borrower must invest sensibly to generate enough funds and improve the worth of its asset, to be able to increase the EMI amount.
Higher amount of interest is charged, the longer the borrower take to repay the loan. Partial pre payment speedup the decrease of loan obligation and the loan tenure. Income from big gains from stocks and shares, sold property, tax saving investments, matured fixed deposits, rental income etc can be used to make a partial pre-payment. Many banks/ NBFC’s do not charge fee for the facility or this can be negotiated at the time of contract between the lender and the borrower.
No Delay or Missed payments
Skipped installments not only pull out surplus cash from your fixed budget but also affect the credit score. It is to ensure that your loan account should never be tagged as Non Profitable Account (NPA). Accounts with outstanding payments of more than 90 days are categorized as NPA’s. It is important to understand and evaluate the necessity of the new loan until the old one is repaid.
Calculate the Current Debt Situation
Terms like credit utilization and debt to income ratio can be better understood while managing your debts and credit score. The scores get a great impact with these calculations and due to which lenders decide to offer you the favourable terms and conditions.
- Credit Utilization Ratio
The percentage of the current available credit that is already in use refers to credit utilization ratio. For example: a credit card with a limit of 2, 00,000 has a current balance of 40,000. The credit utilization ratio turns out to be 20%.
- Debt to income Ratio
The percentage of the monthly or annual income that goes towards paying off the debts one already have. For example : If Mr. X earns 1,20,000 per month and his combined loan of car, home and credit card payments amount Rs. 40,000. The Debt to Income Ratio turns out to be 33%.
There are other factors also that help in determining the credit score, but these two are significant in the calculation. Effective debt management and to improve the credit score the credit utilization ratio and debt to income ratio should not shoot up more than 30%.
Spending need to be budgeted properly. Lower the debts, higher the credit score and your financial statics are in good shape. Important tools like emergency savings and investments can be helpful as a strategic budget. Whereas if the credit score is low and the debts are out of control, this budget can serve you as a lifeline.
Maintaining Income more than expenses is challenging and the budgeting depends on your discipline and willingness to stick to the plan you create.
Keeping the above points in mind can help you to take a walk in park peacefully. After all, it’s about managing your money in the right way. If you can do it, there is no chance of missing your EMI’s or find innovative ways to mess them. And if you still need help, connect with the experience team of Mudrahome.