Managing personal finance is not an easy task. Despite prudent saving approach, one does find himself/herself in an emergency that needs additional financial support and ends up taking a personal loan. Credit card payments and EMIs have become a way of life. It’s not surprising to see the high stress level among salaried professionals in managing them. When the income is fixed and new EMI is added, it disturbs the monthly cash management.
In such unavoidable situation, which can happen to any of us, one should be aware of few financial management techniques. Here’s a way to understand the truth.
Borrow what you need: Debt, in any condition, is a liability. Therefore, it is imperative that you analyse loan requirement as well as reassess your personal expenditure before applying for a loan. Your goal must always be to minimise financial burden as much as possible – both, overall and monthly. It is advised to keep fixed monthly obligation to income ratio under 50 per cent. You would like to ensure that EMI that you’re about to take could be easily accommodated within your other monthly expenses without causing a strain.
Keeping that in mind, calculate exact loan amount as per requirement and apply for the same. There is no point paying extra interest or having fixed EMIs for the amount you are not using.
In a realistic situation, one cannot predict exact expense. For example, home renovation or medical emergency. In such cases, it’s better to take personal overdraft kind of loan. You withdraw in tranches and pay interest only on the amount that is withdrawn. It straightaway meets your requirement and also reduces overall cash outflow.
Choose perfect personal loan: In this digital era, personal loans are now customised to your requirement. Diversified portfolio that fintech companies offer helps you choose loan that suits your requirement the best. Unique and innovative products are available in the market, it is up to you to choose wisely.
Take a simple example of wedding loan. Wedding comes with multiple expenditures and is followed by honeymoon. This all leads to much unstable financial condition after marriage. If one chooses personal loan for meeting these expenditures, cash outflow will be much higher right from the month of taking loan. But choosing specialised products like wedding loans & holiday loans ease the situation. They offer flexibility in loan repayment with option of interest only payment in first few months. Thus, the cash management becomes much better.
Another such example is rental deposit loan. In cities, like Mumbai or Bangalore, where you need to pay 11-33 month of rent as security deposit. It is not wise to take personal loan with fixed EMI to pay the deposit. Rental deposit loan covers this security deposit and is paid directly to the landlord. The borrower or tenant pays only interest. This saves him/her from the fixed EMI cycle and he/she repays interest only for the tenure of rental agreement. You can enjoy such customisations by exploring the options available in the market.
Paying off loan with early payments: One of the best ways of managing loan smartly is to keep reducing your outstanding amount. Whenever one gets surplus money, it can be used to pay a part of personal loan. It happens that one gets quarterly bonus or some fixed deposit matures leaving borrower with surplus money because of high pre-payment charged, borrower is helpless and continues to pay fixed EMI. You need to check the prepayment charges from your lender beforehand.
EMI-free loans let you pay interest only every month and make bullet payments to overall principal amount. It is a tailor-made product and you are the decision maker. Most of these loans have interest calculation done by simple interest method. Bullet payments in this kind of loans can have significant impact on your cash flow management.
Credit discipline: It’s one of very basic criteria in personal finance. Making your loan repayments must always be priority and is important for good credit score. But how can a good credit score benefit you? A good credit score reflects your creditworthiness as well as repayment abilities to a potential lender. So, applicants with good credit scores are given preference by lenders so much so that they’re often willing to negotiate loan terms with them. This means that you can easily avail a loan with more relaxed loan terms if you have a good credit score.
Debt consolidation: If you have multiple loans running or even have unpaid outstanding on two-three credit cards, it is advisable to consolidate debt as one, preferably with one at lower interest rate. Credit cards often charge much higher rate of interest against personal loan. A debt consolidation loan, like credit card takeover loan, helps clear outstanding in one go. In addition, it helps build better financial discipline as long as one restricts further usage of credit card.
Ensure a financial buffer: Most expenditure that we encounter is largely the ones that we rarely would’ve anticipated during a month. Whether it is a vehicular breakdown, an urgent visit to family in another town, or a medical emergency, there are endless examples to quote. So, make sure that you always have enough financial buffer while availing personal loan, to meet such unanticipated financial needs. Never create excess financial pressure on you.
But despite being a pragmatic alternative, personal loans are still accompanied by responsibilities. Being prudent and assessing all unbiased options before taking loan will ensure maximum gains and minimum liabilities. Today fintech companies have made disbursement process relatively easy and options to choose kind of loan is far more than earlier times. Awareness is important in managing one’s finance. After all, these loans do eventually help in saving more than they cost.
(The author is co-founder and chief executive officer of Loantap.in)