How to pay off loans wisely
- The holiday season is always associated with higher spending as people wait until this time of year for great discounts.
- Many people opt for NDEs on credit or debit cards to finance their major purchases during the holiday season
- Whichever strategy you choose, you need to make sure you don’t miss any EMI payments
New Delhi: The holiday season is always associated with higher spending, as people wait until this time of year to take advantage of the great discounts offered by e-commerce platforms and retailers. Many people opt for Equivalent Monthly Payments (EMIs) on credit or debit cards to fund their major purchases during the holiday season if they don’t have the excess to spend. Some individuals also opt for personal loans to finance their party expenses in case they don’t have cash.
In such a scenario, effective management of IMEs is essential so that you never default on loan repayments while keeping your interest charges low. Here are some of the strategies you should follow to keep your interest charges low and reduce the burden of EMI.
Opt for a shorter tenure on credit card loans
If you make a large purchase with credit cards and convert them to smaller IMEs, be sure to keep the terms of those loans under 12 months. A shorter tenure will help keep your overall interest cost low even if the interest rate on these loans is high. It will be better if you go for a three- or six-month tenure, as most online marketplaces offer free IMEs for such tenures.
If you make multiple purchases using the credit card EMI facility and cannot afford larger EMIs to shorten the loan term, consolidating these loans into one loan will help you save money. . For example, you made six big purchases worth Rs 1.5 lakh and converted each credit card loan to a 2 year EMI, then your interest charge on the loan for the two year term will be ranging between Rs 25-30,000, assuming you pay 18% interest on these loans. On top of that, you also pay a processing fee and GST on the interest component.
In order to reduce your interest charge, you can opt for a two-year personal loan, which you can get at an interest rate of 12% or less and pay off all credit card loans. By doing this, you can save Rs 5-8,000 on interest charges over the two years and the repayment will become hassle-free to save interest charges.
Another thing that you can do in such a scenario is the balance transfer. If you have more than one credit card, you can transfer the outstanding balance from one credit card to another and pay off the amount within the next six months at lower interest rates. Typically, banks charge lower rates on credit card balance transfer than longer term IMEs.
There is another way to reduce your EMI burden if you already have a personal loan that is more than a year old. By opting for personal loan balance transfer, you can qualify for an additional loan at lower rates while reducing the interest rate on the existing loan amount. Banks typically offer a 300 to 400 basis points lower interest rate on personal loan balance transfers.
Avoid late payments
Whichever strategy you choose, you need to make sure that you do not miss any EMI payments, otherwise it will cause additional financial burden and damage your credit score. In addition, paying off loans on time helps you maintain a good credit rating so that you can qualify for future loans at lower interest rates.