Every loan or debt repayment comes with its own terms and conditions. For example, credit cards have high interest rates to the tune of 13.6%. If you miss your repayment date, then you also have to pay late fees and other high charges. But a home loan has the longest tenor. Its average interest rate is usually 10% to 11%, with a tenor of around 15 years. Suppose you have two home loans, one for your home and one for another that you have purchased for your parents, or as an investment, your debt increases.
When you club these financial obligations, it is easy to see that having so many loan EMIs can be overwhelming. You may miss an EMI on your home loans. As a result, your debt increases. Also, your credit rating suffers. This vicious cycle is what can hurt you in the short and long term.
What Can You Do?
Transfer your home loans for a better interest rate You can transfer your home loans to another lender with a better interest rate. This is known as home loan balance transfer. This will reduce your EMIs, as well as your total debt burden. You can also talk to your existing lender and ask them to reduce their current interest rates.
Additional Read: How Does a Home Loan Balance Transfer Work
Another way to significantly lower your loan burden is to make home loan part prepayments towards the principal. If you get an annual bonus or returns from another investment, you can divert a portion towards paying off a chunk of your loan. This will clear your loan steadily, while lowering the amount of your remaining EMIs.
Reset your loan to MCLR
If you took a loan after 1 April, 2016, you can switch to a Marginal Cost of Funds Lending Rate (MCLR). It ensures that whenever the Reserve Bank of India (RBI) reduces the repo rate, the benefit is passed on to you in a short span of time. It comes with a reset option that reviews the interest rate at least once a year (depending on the financial institution). This way, when rates are lowered, you stand to benefit greatly.
Increase your EMI
A simple yet considerable way to reduce the burden of loan repayment is to increase your EMI every time your income increases. Even if you are able to do this by 5%–10% every year, you’ll be able to reduce your home loan repayment burden. Along with this, you can also consider increasing it by a greater amount should you receive a promotion. Optionally, you can pay an extra EMI each year or twice a year in line with when other investments mature.
You can take a single loan to pay off multiple home loans. In other words, you can consolidate your debt. It is regarded as one of the best ways to manage multiple loan repayments.
Additional Read: 4 Ways to Consolidate Your Debt
Consider this: Sukanya Sarkar is a working member of her family and has elderly parents who are dependent on her. She earns Rs.1 lakh per month. Sukanya has two home loans in her name. Here is a look at her current financial situation:
Sukanya has a home loan of Rs.35 lakh, with a tenor of 20 years. She has 17 years left to repay the loan at a rate of interest of 10.5%. The EMI is Rs.34,943. She also has second home loan of Rs.30 lakh with a tenor of 15 years and an interest rate of 8.7%. The EMI is Rs.29,895. Sukanya spends Rs.64,838 every month on debt repayment. So, she has only 35,162 for all other expenses, including the medical care her parents need.
What options does Sukanya have?
Sukanya can consolidate her debt simply. To do this, her total loan repayment amount will become Rs.65 lakh. If Sukanya chooses a tenor of 180 months, with an interest rate of 11%, she will save 0.33% on the rate of interest, and her EMIs will go down by Rs.5,011 each month.
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