When facing financial constraints or emergencies such as medical expenses, weddings, or children's school fees, a personal loan often emerges as the quickest available solution. Banks and non-banking finance companies approve these loans within hours, but this comes at a significant cost: high interest rates and a monthly EMI that weighs heavily on your budget.
High Interest Rates, EMI Becomes a Source of Stress
Personal loans don't require guarantees or security, making them higher risk and consequently leading to higher interest rates. People often rush into taking loans at high interest rates, and their monthly EMI becomes a heavy burden.
Increasing Tenure Can Reduce Installments
If you're unable to pay your current EMI on time, the first thing you can do is talk to your bank about extending the loan tenure. As the tenure increases, the monthly installments decrease. Although this will result in a higher total interest payment, it can reduce the monthly pressure on your finances.
Make Partial Payments with Bonus or Savings
If you receive an annual bonus, tax refund, side income, or have savings, use it as a partial payment or pre-payment on your loan instead of spending it. This will reduce your outstanding principal and potentially lower your future EMIs.
Some banks do not charge for pre-payment, but there are conditions. For example, banks like HDFC, ICICI, or Yes Bank offer this facility only after a few months.
Step-Down EMI Plan Reduces Installments Over Time
Some banks also offer EMI plans in which the installments are initially higher but gradually decrease over time. This is called a step-down EMI plan.
HDFC Bank, ICICI Bank, and Kotak Mahindra Bank offer this option. If you're willing to pay a slightly higher EMI in the initial months, this plan can be useful for you.
Improved Credit Score Offers Better Deal Opportunities
If your credit score is above 750, you may be eligible for a new loan at a lower interest rate. In such cases, you can transfer your old loan balance and benefit from lower EMIs.
Additionally, a good credit score opens doors to easier financing in the future. Therefore, it's essential to pay your loan installments and credit card bills on time.
Financial Planning Can Reduce Stress
If the EMI is disrupting your monthly budget, it's important to review it. Prioritize expenses and cut back on unnecessary spending. Also, keep a separate fixed fund for the EMI so that any monthly disruption doesn't affect your credit history.
Use Digital Tools for EMI Management
Many banks and financial apps now offer EMI calculators, budget trackers, and pre-payment planning tools. You can use these to plan your loan EMI and see how much your EMI will decrease by making a certain amount of pre-payment.
Comparing Interest Rates is Essential
Often, people take a loan from the first bank they approach without comparing other options. However, the interest rates of each bank and NBFC vary. One may have a rate of 10.5 percent, while another may have 14 percent. Therefore, if you thoroughly compare options before taking a loan or transferring the balance, you can get a better deal.
Read the Terms and Conditions Carefully When Taking a Personal Loan
Before signing the loan documents, it is important to fully understand its terms. Be aware of any hidden charges, processing fees, pre-payment penalties, or foreclosure charges before taking the loan. Only then will the EMI burden not increase in the future.
