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Why your financial planning should begin with loan management
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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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A financial plan includes everything from setting up multiple sources of income and budgeting to tax planning and debt management. However, most people often tend to only focus on savings and investments. That can be counterproductive because in order to build wealth, you need to first manage your debt effectively. Loan management does not only mean paying back your loans but also managing your debt in a manner that is not detrimental to your financial health. So, how can you do that? Here are a few things to consider.
1. Prioritise paying off high-interest debt
It’s not realistic to pay off your debt all at once. However, you should prioritise paying off high-interest loans over any other financial goal. For instance, if you have credit card debt on which you are paying 38% interest per annum, you should pay that off instead of trying to build an investment portfolio by investing in stocks, mutual funds, fixed deposits, etc.
Here, your money will be better utilised by paying off such high-interest debt. That’s because the returns you can earn through such investments will be significantly lower than the interest you have to pay on such high interest loans and hence you would be losing money if you focus on investing.
2. Consider consolidating your debt
If you have too many different types of loans with different repayment tenures and Equated Monthly Instalments (EMIs), you can consider consolidating all of them into a single loan. You can look into applying for a -personal loan for debt consolidation. Personal loan eligibility is simple, and the personal loan interest rate can be favourable depending on your credit score and repayment capacity.
You might be able to get a better deal in terms of the interest rate and other loan terms if you consolidate all your debt with a lender, with whom you have a good relationship. It will also make it easier for you to track your EMI payments and avoid missing any loan dues. Before you apply for a personal loan, you can use a personal loan EMI calculator to determine whether consolidating your debt through this option would end up being cheaper than your current debt profile.
3. Opt for a balance transfer
If you don’t have too many loans but have one loan such as a home loan, which is a long-term commitment with an EMI that is significant, you can consider opting for a balance transfer. A balance transfer involves transferring your loan from your existing lender to a new lender if they offer a lower interest rate and other more favourable loan terms.
A balance transfer in the initial stages of the repayment tenure can be helpful as it can significantly reduce your interest outgo. During a balance transfer, you can also change your repayment tenure – extend it to lower the EMIs or shorten it to lower the interest burden – depending on changes in your income and overall financial situation.
While you are managing your debt with these loan management tips, you should also avoid taking on any new debt, at least for the time being. While some situations may require financing such as a financial emergency, most others can be dealt with without taking on more debt.
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