A friend recently contacted me to help him get a personal loan from my bank. When I asked him, why he required a personal loan, he told me that he had a few personal loans on which the rate of interest is too high. He shared with me the list of personal loans taken by him. I noticed that he has taken 5-6 loans from different banks and NBFCs. We’ll return to his problem, but let’s first understand what a personal loan is. Then we will understand, how to close a personal loan quickly.
A personal loan is an unsecured loan. All bank and non-banking finance companies offer it to meet their customer’s wide-ranging short-term needs. Since the start of digital processing, the borrowings in the personal loan segment have been growing by leaps and bounds. Now few lenders claim to provide a personal loan, in which from application to disbursement of loan is done in few minutes. Due to easy availability and faster processing, many individuals take personal loans for quick financial assistance.
However, it is also important to pay off your personal loan quickly. This helps you save interest and reduce your overall debt so that you can manage your finances effectively. A personal loan is a high-interest loan due to its unsecured nature; therefore, it needs to be repaid faster.
Getting to know your repayment schedule
If you are taking a personal loan, you must have a clear understanding of the repayment schedule. A repayment schedule outlines, how much installment you need to pay monthly and for how long. It gives a clear roadmap, so that you have a clear understanding of, how much you owe.
Prepayment of an additional EMI
At the time of availing a personal loan, please enquire about prepayment terms. Prepayment is the repayment of a loan before it becomes due. As per Reserve Bank of India’s directive, no Bank can charge a prepayment penalty on personal loans and home loans. You must also know, how much minimum amount can be prepaid at once. For example, in ICICI Bank, a minimum prepayment is equivalent to one month’s EMI.
It is one effective way to pay off your personal loans faster. You can decide to prepay additional EMI in every quarter or every year, at your convenience. Prepaying an additional EMI will result in a significant reduction in both the principal and interest. That means you are closer to clearing your loan much ahead of schedule. If repaying an entire extra EMI feels burdensome at every 3 months, you can increase the frequency to every 6 months. For prepayment, plan ahead. Keep on accumulating excess cash. You can keep this excess cash aside to some other account, so it may not be used for regular expenses. You can also keep this additional money as a Fixed Deposit, till the time comes for extra EMI payment.
Take a smaller duration loan
Taking a personal loan of a smaller duration is another effective strategy for faster repayment. Although you have to pay higher EMIs, you will still save significant interest over the life of the debt. For instance, if you are taking a INR 10,00,000 loan at 12% interest, you will save INR 1,40,000 interest for 3-year tenure, as compared to 5-year tenure.
Consolidate multiple loans
If you have multiple personal loans from multiple lenders, it is advisable to consolidate all loans into a single personal loan. It will simplify repayment and you will be saved of missing any payment deadline. Multiple loans could have different interest rates. While consolidating, you can negotiate better terms with new lender. Better terms could be in the form of lower interest rates or longer tenure. Consolidating debt at lower rates or lower tenure will reduce your total debt burden and you can be debt free faster. I will give the same advice to my friend, who had multiple personal loans.
Refinancing at lower interest rates
Personal loans are generally provided at fixed interest rates. However, banks keep on changing interest rates depending on the conditions of the economy. If you find that market rates are significantly lower than your personal loan interest rate, you can negotiate with your bank to reduce interest rate. If the bank does not agree, you can explore refinancing from some other bank. Refinancing involves taking a new loan at better terms to payoff existing loan. By taking a loan at a lower interest rate, you can reduce your EMIs and repay your loan faster. You need to account for processing fees or prepayment penalties before deciding on refinance. Typically, 1% reduction in market interest rates is suitable to look for refinancing.
Avoid any default/ delays on EMIs
Missing an installment on loan repayment affects your credit score. Banks also add penal interest or penalty for defaults or delay in payment. Set up automatic EMI payment (auto debit) in your account for timely repayment. You need to be very careful, while selecting date of auto debit. It must be aligned with cash inflows in your account. Such as, if you are salaried and receive monthly salary on the last date of month, you can keep auto debit within 2-3 days of that, say second or third day of next month.
By paying timely, you can make yourself a good credit profile and avoid any money on penalty on late payments.
Keep a close watch
Keep reviewing personal loans regularly. Keep a track on principal and interest amount being paid. If you receive some unexpected money, use it for making prepayment of personal loan. Remember, even an extra EMI per year makes a lot of difference.
Conclusion
Remember, personal loans are great utility. You can get it faster, without any collateral. Processing is very fast. You can get it in few minutes of application from few lenders. But also note that a personal loan is high-cost and must be used only in exigency. In terms of peaking order, these are only better than credit card loans (Never take credit card loans). Given an option between credit card loan and personal loan, take personal loans. You can use the above-mentioned methods to repay your personal loans faster and save a substantial sum on interest payment. Just be more careful and be a disciplined borrower.