Personal loans are often taken to cover urgent expenses or significant financial needs. On the other hand, nonpayment of a personal loan may result in dire repercussions, such as lawsuits and a sharp decline in your credit rating. This can complicate future financial opportunities.
Therefore, it’s crucial to repay your loan on time. In this piece, we’ll go over the top five strategies for effectively managing your personal loan.
Also read: Navigating the legal maze: The consequences of personal loan default
How to manage your personal loan?
#1 Create a realistic budget
Knowing your financial standing is a must. It assists you in understanding how much of your income goes towards loan repayments and where it is allocated. Without this knowledge, tackling your personal loan effectively becomes very hard.
First off, start by gathering all your financial data. List your monthly income from all sources. Next, list all of your regular expenditures. Don’t forget to include variable expenses and discretionary spending. Finally, list all your debts, including your personal loan.
For example, let’s consider Prasad. He has a monthly salary of ₹50,000. He has a personal loan of ₹2 lakhs.
First, Prasad lists his fixed monthly expenses: ₹10,000 for rent, ₹5,000 for utilities, ₹7,000 for groceries, and ₹3,000 for transportation. This totals ₹25,000. After accounting for his other EMI of ₹5,000, his total fixed expenses come to ₹30,000.
Make a monthly budget after knowing your financial standing. Allocate specific amounts for each expense category.
Continuing the example, to pay off ₹2 lakhs in 1.5 years at an interest rate of 10.8%, Prasad would need to pay approximately ₹12,000 per month.
EMI = P * r * (1 + r)^n / ((1 + r)^n – 1)
=200000*(10.8/12)*(1+(10.8/12))^18/ ((1+(10.8/12)^18-1)
≈ ₹12,000
Adding this to his fixed expenses and other EMI, his total monthly outlay is ₹42,000. This leaves him with ₹8,000 for variable expenses and savings.
| Category | Amount (₹) |
| Monthly salary | 50,000 |
| Fixed expenses | 25,000 |
| Other EMI | 5,000 |
| Loan repayment | 12,000 |
| Total expenses | 42,000 |
| Remaining balance | 8,000 |
To manage his budget, Prasad must reduce discretionary spending. He can cut back on non-essential expenses to free up more funds for his loan repayment.
#2 Review the details
Understanding your loan’s terms and conditions is crucial. Prior to signing, thoroughly read the entire loan agreement. This document contains important terms, costs, interest rates, and repayment schedules. By knowing these details, you can manage your debt more effectively and avoid unexpected issues.
Pay particular attention to the interest rate, annual percentage rate (APR), origination fees, repayment period, and late payment fees. Verify whether premature payment penalties exist. Making additional payments may not be as appealing to you if your lender charges a fee for loan early payoff.
While early repayment might seem like a good strategy, it’s important to calculate if the savings on interest outweigh any prepayment penalties. To make an informed choice, weigh the possible interest savings against the prepayment penalty’s cost. By reviewing these details carefully, you can manage your personal loan more efficiently and avoid costly surprises.
You may also like: Prepayment penalty: Things to know before taking a personal loan
#3 Contact your relationship manager for personal loan status
It’s critical to keep yourself informed on the progress of your personal loan. Maintain constant communication with your relationship manager to receive loan updates.
Keep lines of communication open with your relationship manager if you are having financial challenges. They can assist you in looking into possibilities such as talking about hardship programmes or changing your repayment terms. Maintaining this channel of communication can help you handle your loan well and make wise judgements.
#4 Create a repayment plan
Making a strategy for repayment is essential to effectively managing your personal loan. In the end, it speeds up debt reduction.
- Configure automatic payments: Several lenders allow you to set up automatic payments right from their online account page. You can plan monthly withdrawals by inputting the data of your bank account, which will guarantee that you never forget a payment and do not incur late fees.
- Prepayment: Think about paying more wherever you can. You can reduce the length of your loan payback period and ultimately save money by making even modest additional principal payments. Consider using a recent large bonus from work or an unforeseen windfall to settle your debt in one single payment.
Ask your lender to apply any additional or lump-sum payments you intend to make as principal-only payments. Making lump sum payments lowers the principal balance, which lowers interest payments throughout the course of the loan.
- Debt snowball method: Pay the smallest loan first, ensuring that the minimum payments on subsequent obligations are made. Utilise the money that remains after paying off the smallest loan to pay off the next smallest debt. This accelerates the snowball impact of your debt reduction.
- Debt avalanche method: Give the loan with a high interest rate priority over the one with the smallest amount. By doing this, you reduce the total amount of interest paid over time and end up with larger long-term savings.
#5 Consolidate or refinance your loan
Refinancing is the process of getting a new loan in place of your existing one, preferably with a lower interest rate. This can lower both the total interest paid over the course of the loan and your monthly payments. In particular, refinancing may be advantageous if your credit score has increased since you initially obtained the loan. Pay attention to current interest rates and your credit score.
Your finances may also be made simpler by combining many debts into a single debt consolidation loan. By combining all of your bills into a single, affordable payment, this method lowers the possibility that you may miss a payment.
Consolidating your high-interest credit card debt with your loan may be a wise choice. Make sure there are no excessive origination fees or other costs on the new loan that would cancel out your savings.
Also read: What is Refinancing Using a Personal Loan?
Bottomline
Managing your personal loan efficiently is key to maintaining financial stability. You may lower your debt and reach your financial objectives by making a budget, comprehending the terms of your loan, contacting your lender, and exploring other ways to return it.
Put these suggestions into practice to manage your debt more skillfully and lessen your financial load.
