Most people who do the borrowings breathe a sigh of relief when their loan application is approved and the amount is credited to their account. However, what impacts their financial future is the way they behave with the loan, or simply put, how they repay the loan. Here are a few aspects to keep in mind after a loan is sanctioned:
Never delay or miss an EMI
Once your loan is sanctioned, make sure you pay the EMIs timely as it boosts your credit score and reflects favourably on your credit report as well. However, any kind of delay or misses in payment pulls down your score and you also end up incurring penalties and fines. Such delays are mentioned in your credit report and can adversely affect your future loan applications. Missing payments successively may lead you to getting blacklisted by the lenders and you can even be labeled as a defaulter. Therefore, ensure you pay every EMI in full and in time to avoid incurring any charges and damaging your credit score.
Prepay if you have funds
Prepaying your loan in full or partially can lead to substantial savings in interest cost. Whenever you have additional funds due to bonuses, increase in salary, returns from investments, etc., use them to prepay your current loan. However, make sure the savings in interest component through prepayment exceeds the prepayment charges of loan (if any). Do not use the funds earmarked for long-term investments to prepay your loan. Also, increasing your EMI amount every year can save you on the interest cost as the principal goes down and also helps in closing the loan sooner.
Do not disturb emergency fund
Using your emergency fund to pay for your loan is not a good idea. Even for prepayment of your loan, never use your emergency funds kept in savings account, liquid funds, etc., as the primary purpose of this fund is to meet your needs in financial exigencies such as job loss or severe illness. Make sure your emergency fund’s size is 5-6 times your monthly expenses and use it only in case of emergencies.
Avoid additional loan
An additional loan increases your financial burden substantially, especially when you haven’t closed the current loan yet. Since every loan comes with interest cost along with principal to be repaid, avoid taking a loan until you have already paid the current one in full. Also, multiple loan applications in a short span brings down your credit score, since you would come across as credit hungry and more likely to default. Therefore, always try to close your current loan in case you are planning to take another loan in near future.
Opt for balance transfer
Even after your loan has been sanctioned, keep a tab on offers from other lenders. In case your lender refuses to reset the interest rate or provide better services, transfer your outstanding loan balance to another lender who’s offering lower interest rate along with better terms and conditions. Through balance transfer you can save a significant amount on the total interest payout during your loan tenure. Make sure you take into consideration the costs involved before finalising your balance transfer decision. Your savings through loan balance transfer should outweigh the various costs involved.
Take insurance for big-ticket loans
For loans which involve large amounts, such as home loan and car loan, taking an insurance cover ensures your family is not left burdened with your outstanding loan in case of your untimely death. Generally, a reducing cover term plan is offered by lenders, which offers insurance equal to the outstanding amount at the time of borrower’s death or any other mishap. Your life cover should ideally be 10-15 times your annual income and regular term plans are a great option for this as they provide such cover at very low premiums. Hence, it is wiser to opt for an insurance cover to save your family from getting into any financial trouble due to outstanding loans when you are not around.
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