Loan Repayment - Good Practices to Follow

Applying for a loan to meet a temporary financial crunch can prove to be a smart move if you choose the right type of loan. It’s great news if you’ve found a financing option that suits all your requirements but do not forget the fact that loan repayment is also a liability. So, make sure that you manage the funds received from the loan efficiently and repay the loan amount on time to avoid getting into a bigger financial crisis.

Most banks and NBFCs give you an option to choose a loan repayment schedule at your convenience. When you opt for an EMI system for loan payment, make sure that you do not miss a single EMI as it can impact your credit score (not in a good way, of course). Other than this, late EMI payments can also lead to some late fees as well.

Here are a few good practices you should follow for the repayment of loans without letting them unnecessarily burden your pocket.

Use the Loan Amount for Its Intended Purpose

This is one of the first things to keep in mind while applying for a loan. Generally, people end up using their loan on things other than the purpose it was actually taken for. When this happens, there will be a lack of funds for the original purpose. When you use those funds the right way, you are more likely to repay the lender on time.

Prioritize High-Interest Loans

If you have more than one loan then it is always a good idea to identify the ones that are of high priority. You can set this priority on the basis of interest rates or loan tenure. As a rule of thumb, loans with higher interest rates need to be paid off first. Since most of the lenders give an option for online loan repayment, try to pay the EMI for that loan as soon as you can. This way, you can minimize the total interest amount that needs to be paid on your loans, also known as the ‘debt avalanche’ technique. Or, you can choose to repay smaller loans first as will reduce the number of loans that need to be paid.

Repay with Savings

If you have enough savings to pay off an outstanding loan, you can consider doing that. The reason behind that is simple - the interest on your loan will always be higher than the interest you will get from the bank on your savings. So, why not use that money to foreclose the loan.

Debt Consolidation

Taking another loan to pay off the existing ones does not seem a good idea. But this can prove to be a smart way to take care of an outstanding loan when your cash flow is under stress. If you have multiple loans then paying all those EMIs on time can be a real struggle. And sometimes, this can lead to late EMI payment fees. To avoid this, you can consolidate all your debt in one single loan (if possible). This will not only streamline the loan repayment process but make it much easier. Now you will have a single loan to worry about and things will get a lot easier.

Reduce the Tenure

This is something you should always do with loans with long tenure. You can reduce the tenure every time there is a rise in your annual income. However, this increases the loan EMI amount but the overall interest that needs to be paid on your loan gets reduced significantly.

Make Extra Payments

Here is another thing you can do to repay your loans efficiently. Apart from paying the usual EMIs, you can choose to make part-prepayments towards your loans. These extra payments go toward the principal amount and when the principal reduces, the interest amount of your loan will be lower as well.

Round Up the Loan Payment

This is a trick to repay a loan faster. If the EMI amount for your loan is almost not in a round figure, you can round up the payment amount. After a while, this rounded-up value will become a routine and the extra money will go towards your principal amount.

When you apply for a loan to fulfil any financial requirement, having a clear idea about how to repay your loans efficiently is also very important. This will not only save your precious time but a large portion of your hard-earned money as well. Following these few tips, you can streamline your loan repayment process while reducing the debt obligation and improving your credit score.

Muthoot Finance offers a wide range of loan options at highly-competitive interest rates. Visit your nearest Muthoot Finance branch to know more.