Personal loans can be valuable for managing your finances and achieving your goals. Whether you are using a personal loan to consolidate debt, make a large purchase, or cover unexpected expenses, it’s essential to have a repayment strategy to ensure that you pay off the loan on time and avoid unnecessary fees and interest charges.
Here are some personal loan repayment strategies to consider:
Create a Budget
The first step in creating a personal loan repayment strategy is to create a budget. A budget can help you understand your income and expenses and identify areas where you can reduce spending to free up more money for loan payments. By creating a budget, you can determine how much you can afford to repay your monthly loan and stay on track with your repayment plan.
For example, let’s say you have a personal loan with a monthly payment of Rs.3,000/-. By creating a budget, you realize you can reduce your entertainment expenses and free up an extra Rs.1,000/- monthly. You can use this money to make additional payments towards your loan and pay off the loan faster.
Choose the correct Loan Terms
When you obtain a personal loan, you can choose the loan terms, including the loan amount, interest rate, and repayment period. Selecting the correct loan terms can help you save money on interest charges and make it easier to manage your debt.
For example, you must borrow Rs.1,00,000/- to consolidate high-interest credit card debt. You can choose a personal loan with a 5-year repayment period and a 10% interest rate or a 3-year repayment period and an 8% interest rate. By selecting the 3-year loan with the lower interest rate, you can save money on interest charges and pay off the loan faster.
Make Payments on Time
Paying on time is one of the most important personal loan repayment strategies. Late payments can result in fees and penalties and negatively impact your credit score. Set up reminders or automatic payments to avoid late payment charges to ensure you make your loan payments on time each month.
For example, let’s say your loan payment is due on the 15th of each month. You can schedule a reminder on your phone or computer to remind you to pay on time. Alternatively, you can set up automatic payments with your lender to ensure the payment is made on time each month.
Pay more than the minimum
Paying more than the minimal monthly payment can help you to payback your loan faster and reduce the total interest you pay. Even an extra Rs.250/- or Rs.500/- per month can make a big difference in the long run.
For example, let’s say you have a personal loan with a monthly payment of Rs.3000 and a repayment period of 5 years. By making an extra Rs.500 payment each month, you can pay off the loan in just over 4 years and save over the additional interest amount.
Consider Biweekly Payments
This strategy involves making payments every two weeks instead of once a month. Making biweekly instead of monthly payments can help you to repay your debt faster and reduce the total interest you pay. You earn 26 half-payments yearly, equivalent to 13 full payments, by making half your monthly payment every two weeks.
For example, your loan payment is Rs.3,000/- per month. By biweekly payments of Rs.1,500/-, you make 26 half-payments each year, equivalent to 13 full payments. This can help you repay your loan faster and save on interest charges.
Snowball Method
This strategy involves paying off your smallest debt first and then moving on to more significant debts. You make minimum payments on all other debts and put any extra money towards the smallest debt. Once that debt is paid off, you move on to the next smallest debt and continue the process. This method can help you build momentum and motivation as you see progress with each debt you pay off.
Example: Assume you have three credit cards with balances of Rs.1,000/-, Rs.3,000/-, and Rs.5,000/-. You make minimum payments on the two more significant balances and put all your extra money towards the smallest. Once the smallest balance is paid off, you move on to the next smallest balance, and so on.
Avalanche Method
This strategy involves prioritizing debts based on their interest rates. You make minimum payments on all debts but put any extra money towards the debt with the highest interest rate. When you have paid off that loan, you move on to the debt that has the highest interest rate and continue the process. This method can save you money in the long run by minimizing the interest you pay.
Example: Let’s say you have three debts – a personal loan with an interest rate of 10%, a credit card with an interest rate of 18%, and a car loan with an interest rate of 5%. You make minimum payments on all debts but put all your extra money towards the credit card debt, as it has the highest interest rate. Once the credit card debt is paid off, you move on to the personal and car loans.
Balance Transfer
This strategy involves transferring high-interest debt to a lower-interest account, such as a credit card with a 0% introductory rate. This can save you money on interest payments and help you pay off debt faster. However, be aware of balance transfer fees and ensure you can pay off the balance before the introductory rate expires.
Example: Suppose you have a credit card with a Rs.5,000/- balance and a 20% interest rate. You apply for a new credit card with a 0% introductory rate on balance transfers for 12 months and transfer the Rs.5,000 balance to the new card. You pay off the balance within 12 months to avoid interest charges.
Debt Consolidation
This strategy involves taking out a new loan to pay off multiple debts and consolidating them into one monthly payment. This can help you simplify your finances while also lowering your interest rate, but be sure to compare the costs of the new loan with your existing debt.
Example: Assume you have three credit cards with balances of Rs.5,000/-, Rs.3,000/-, and Rs.2,000/- and interest rates of 18%, 20%, and 22%, respectively. You take out a personal loan with an interest rate of 12% to pay off all three credit cards. You now have one monthly payment of Rs.10,000/- at a lower interest rate.
One can conclude that having a personal loan repayment strategy is crucial to paying off your loan on time and avoiding unnecessary fees and interest charges.