Facing difficulties in repaying costlier loans? Manage your loan EMIs better with these steps

Financial stress or exigencies can force many borrowers to miss loan repayments. As missing EMI repayments can attract hefty penalties on the unpaid dues, it can further worsen the borrower’s debt burden. Non-payment of EMIs by the due date also adversely impacts the borrower’s credit score and future credit card and loan eligibility.

Here are some financial tips for the existing borrowers who are unable to repay their EMIs due to financial constraints:

Redeem fixed income investments not earmarked for crucial financial goals

Fixed-income investments like fixed deposits, recurring deposits, debt funds, etc usually generate lower returns than the returns generated by other asset classes, especially equities, over the long term. Moreover, the returns generated from fixed income investments tend to be much lower than the interest rate of low-cost loan options. Hence, closing or redeeming fixed-income instruments not earmarked for any crucial financial goals should be the first step for those who are unable to repay EMIs on time.

Opt for balance transfer, if feasible

Transferring existing loans to other lenders at a lower interest rate can help borrowers reduce their overall interest cost and the EMI burden. Borrowers can further reduce this EMI burden by requesting the new lender to offer longer loan tenure from the residual tenure of their existing loan. While an increased tenure will increase their interest cost, borrowers can reduce total interest cost later on by prepaying the loan as and when their financial position improves.

Borrowers must remember that the new lender will consider balance transfer requests as fresh loan applications and hence, would levy processing fee, administrative fee and other charges incurred during any fresh loan application. Borrowers should opt for balance transfer only if the overall savings in the interest cost exceeds the associated costs by a significant margin.

Utilize emergency fund for EMI repayment

The primary objective of maintaining an emergency fund is to keep ready a liquid war chest for dealing with unforeseen financial exigencies or income disruptions caused by illness, job loss, disability, etc. Ideally, this fund should be large enough to meet unavoidable monthly expenses like EMIs, SIPs, rent, credit card bills, utility bills, daily expenses, etc. for at least six months. Hence, borrowers must maintain adequate emergency fund for repaying EMIs.

Go for debt consolidation

Debt consolidation allows borrowers with multiple loans to consolidate their existing loans at higher interest rates by availing one or two new loans at a lower interest rate. The loan proceeds of the new loan(s) can be used to pay off the older ones availed at higher interest rates.

For example, home loan borrowers facing difficulties in repaying their personal loan or other costlier loans can avail a top-up home loan to repay the costlier ones. Top-up home loans are usually available at much lower interest rate and for longer tenure than most of the other loan types. Similarly, card users unable to repay credit card dues by the due date can avail a personal loan to do so.

The interest rate of personal loans are much lower than finance charges (23-49% p.a.) levied on unpaid credit card dues. The personal loan tenure usually goes up to 5 years, with some lenders offering tenures of up to 7 years. Hence, a personal loan may allow financially-stressed card users to repay the unpaid credit card bills in smaller tranches in the form of EMIs, as per their repayment capacity.

(By Gaurav Aggarwal, Senior Director, Paisabazaar.com)