Amidst the pandemic and the ever-increasing inflation rates, it isn’t always a walk in the park to accumulate savings and plan your expenses. The rising prices of essential commodities as well as other products comes at an opportunity cost of savings and secured investments. In these circumstances, it is human tendency to opt for the easier-way-out and take a loan to fulfil our needs. However, one must bear in mind that a loan is in-turn an additional expense, especially considering the interest which banks levy on the EMI payable. Also, a higher interest rate in-turn breeds more trouble, since the amount of EMI which you have to pay back automatically goes up.
While sometimes taking a loan to stay afloat is unavoidable, there are certain techniques and tips through which you can save money on loan EMI.
- Opt for loans with a higher repayment tenure
The loan payback period is inversely related to the amount of EMI for a certain loan amount. Every EMI has an option of different months for repayment with varying interest rates, usually at even intervals of 3 months. While it is true that the interest increases with the increase in time to repay loan, however, the amount payable in monthly payments decreases significantly, which may make it easier for you to repay the instalments. However, increasing the loan tenure can also translate to a larger amount of interest over the course of the loan tenure, therefore, it is advisable to always weigh all pros and cons before increasing the duration of repayment.
- Opt for loans with EMI waivers
We’ve seen loan offers where customers are rewarded for continuous prompt payments on occasion. The incentive is a reduction in the number of EMIs due near the conclusion of the loan. While such an offer appears to be appealing on paper, there is no such thing as a free lunch. You should investigate how the lender is compensating this discount. However, there is a possibility that these may bear higher interest rates.
- Use loan restructuring offered by RBI
The prolonged pandemic has put many individuals in financial straits, making it difficult to make ends meet. Many of these debtors are momentarily unable to pay their EMIs. Borrowers in this situation might approach their lender and request a moratorium. A moratorium suspends EMIs or principal payments for a period of time and then restructures the loan to an appropriate repayment schedule.
- Pre-pay your loans
Previously, loan prepayments were subject to a slew of costs. However, most banks and NBFCs have recently ceased charging pre-payment fees, allowing borrowers to return large portions of their house loans before the end of their term. Prepay your home loan online or offline at the start of your repayment term if you want to reduce your EMIs and the amount of interest charged.
- Transfer to a loan with lower interest rates
Finally, if your loan interest rate is out of step with market realities, you may consider switching to a different bank or lender that offers a cheaper rate. You may be required to pay a processing charge as well as a part of your loan balance for the loan transfer. Always assess the expense of transferring a loan versus the interest rate advantage.
- Full or part repayment helps reduce loan burden
Making full or part repayment of loan amounts can significantly help in reducing the loan cost. If you have earned a raise or have come into some money, it is strongly recommended that you prepay your debt in part or in whole. As we all know, a larger outstanding loan amount will result in a higher interest rate. As a consequence, although full prepayment allows you to entirely eliminate the loan burden, part prepayment may also be extremely beneficial by reducing not only the principal amount of the loan but also the period of the loan, resulting in reduced payable interest.