Having trouble repaying more expensive loans? Manage Your Loan EMIs Better With These Steps

Financial stress or demands can cause many borrowers to miss their loan repayments. As missing EMI refunds can result in heavy penalties on unpaid dues, this can further aggravate the borrower’s debt burden. Failure to pay EMIs by the due date also negatively impacts the borrower’s credit score and future eligibility for credit cards and loans.

Here are some financial tips for existing borrowers who are unable to repay their IMEs due to financial constraints:

Redeem fixed income investments that are not intended for critical financial purposes

Fixed income investments like fixed deposits, recurring deposits, debt funds, etc. generally generate lower returns than those generated by other asset classes, particularly equities, over the long term. Additionally, the returns generated by fixed income investments tend to be much lower than the interest rate of low-cost loan options. Therefore, closing or redeeming fixed income instruments not intended for critical financial purposes should be the first step for those unable to repay EMIs on time.

Opt for balance transfer, if possible

Switching existing loans to other lenders at a lower interest rate can help borrowers reduce their overall interest costs and EMI burden. Borrowers can further reduce this EMI burden by asking the new lender to offer a longer loan term from the remaining term of their existing loan. While increased tenure will increase their interest costs, borrowers can reduce the total interest cost later by prepaying the loan as their financial situation improves.

Borrowers should remember that the new lender will consider balance transfer requests as new loan requests and, therefore, will levy processing fees, administrative fees and other costs incurred on any new loan requests. Borrowers should only opt for balance transfer if the overall interest cost savings outweigh the associated costs by a significant margin.

Use Emergency Fund for IME Reimbursement

The main purpose of maintaining an emergency fund is to keep a liquid war chest to deal with unexpected financial demands or income disruptions caused by illness, job loss, disability, etc. Ideally, this fund should be large enough to meet unavoidable monthly expenses like EMI, SIP, rent, credit card bills, utility bills, daily expenses, etc. for at least six months. Therefore, borrowers must maintain an adequate emergency fund to repay EMIs.

Opt for debt consolidation

Debt consolidation allows borrowers with multiple loans to consolidate their existing loans at higher interest rates with one or two new loans at a lower interest rate. Loan proceeds from new loan(s) can be used to pay off older ones at higher interest rates.

For example, borrowers who are having difficulty repaying their personal loan or other more expensive loans can benefit from an additional home loan to pay off the more expensive ones. Supplemental home loans are generally available at a much lower interest rate and for a longer term than most other types of loans. Likewise, card users who are unable to repay credit card dues when due may be eligible for a personal loan to do so.

The interest rate on personal loans is much lower than the financial charges (23 to 49% per year) levied on unpaid credit cards. The term of the personal loan is usually up to 5 years, with some lenders offering terms of up to 7 years. Therefore, a personal loan can allow card users in financial difficulty to pay off unpaid credit card bills in smaller installments in the form of EMI, depending on their repayment capacity.

(By Gaurav Aggarwal, Senior Manager, Paisabazaar.com)