Unlock the secrets to paying off loans faster! Find intelligent strategies that leave you debt-free and your wallet smiling.
We have all heard the saying, ‘A penny saved is a penny earned’, but when it comes to paying off loans, it often feels like we are trying to fill a leaky bucket with those hard-earned pennies. No matter which loan you have opted for – a house, a car, an education, or any other necessity – it can sometimes seem like a never-ending journey down a winding road.
But your loan situation can be improved just like a leaky bucket can be patched up. You can employ practical strategies to pay off your loan faster and save substantial amount.
In this article, we will delve into a few strategies, focusing on easy and actionable steps to help you gain control of your finances and make that debt disappear faster than a scoop of ice cream on a hot summer’s day.
Make One Extra EMI Payment Every Year
Here, you must make one additional payment each year towards your loan. By doing this, you reduce the total amount you owe (the principal amount), and because the interest you pay is based on the outstanding balance, you save money over time.
Let’s understand this with a practical example. Assume you have a home loan of Rs 20,00,000 at an interest rate of 9% for 20 years. Your monthly EMI is around Rs 18,000 per month, and the interest you will end up paying in these 20 years would be Rs 23,18,685.
If you make one extra EMI payment of Rs 18,000 each year, you can finish paying off your loan in about 16 years instead of 20 years. Plus, the interest you pay during this tenure will drop to Rs 18,01,129. So, you will end up saving around Rs 5,18,000 in interest payments.
Make Lump Sum Payments
When you have some extra money or receive a performance bonus, an extra income from a secondary source, unexpected financial gifts, inherited money or a tax refund, consider using it to make a lump sum payment towards your loan.
Let’s see how it can help you in reducing your loan burden.
Suppose you have a personal loan of Rs 2,00,000 with an interest rate of 12%. Your monthly instalment is Rs 4,350; the loan term is five years. Now, you receive a bonus of Rs 50,000 and decide to use it as a lump sum payment. Your revised EMI would be Rs 3,100.
Increase Your EMI by a Said Percentage Every Year
Your salary gets a hike each year, so your EMI should also get a hike. So, each year, you commit to increasing your EMI by a certain percentage. It is a way to keep pace with your growing income and pay off your loan faster.
Let’s say you have a personal loan of Rs 2,50,000 with an interest rate of 12%. Your initial monthly payment is about Rs 5,500; the loan term is five years. During this tenure, you would pay an interest component of Rs 83,667.
Now, you decide to increase your EMI by 10% each year. By doing this, the interest you were paying drops to Rs 73,502. So, you save Rs 10,165 in interest payments and can pay off your loan over four years instead of five years.
Remember, increasing your EMI annually helps you pay off your loan faster and takes advantage of your income growth over time, making it a practical and effective way to become debt-free sooner.
Refinancing means replacing your current loan with a new one, usually with better terms, like a lower interest rate or shorter tenure. This can lead to lower monthly payments and quicker debt reduction.
Let’s say you have a home loan of Rs 30,00,000 at an interest rate of 9% for 20 years. Your monthly EMI is Rs 26,992. The interest you will pay on your loan would be Rs 34.78 lakhs.
If you explore refinancing and secure a new loan at 8% interest, your monthly EMI might drop to Rs 25,093, and the interest you will end up paying would be Rs 30.22 lakhs.
This change could save you over Rs 4.58 lakhs in interest over the loan tenure and help you repay your home loan sooner. But, before you consider the benefits and get all excited about refinancing your loan, do consider the additional charges it comes with like processing fees and other charges.
Paying off your loan faster can be a manageable task. By implementing these simple strategies, you can take control of your financial future. With dedication and discipline, you can reduce the burden of your loan and save thousands or sometimes lakhs of rupees in interest payments.
Remember, every little bit helps, and the sooner you start, the faster you will be on your way to a debt-free life. So, take action today and watch your loan balance steadily decrease, giving you the financial freedom you deserve.
*The article is for information purposes only. This is not an investment advice.