These are tough times for salaried employees in India. As people lose jobs, repaying home loans, car loans and personal loans get difficult. The temptation is to default without realizing the consequences. The CIBIL score is impacted and you may not be able to get crucial loans like a home loan. Worse, repaying loans is a legal, moral and financial obligation. If you have lost the job or been careless with repayments, you might land in the loan trap. These are 8 simple ways of getting out of the loan trap in the New Year 2020.
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You have lost the job and know you are going to default on the loan. Your best chance is to contact the bank and explain your present position in detail. The bank could restructure the loan by increasing the tenure, thereby reducing the EMI burden. This helps get on track with repayments and maintain a healthy credit score. A CIBIL score over 750+ means home loan gets sanctioned easily.
How you negotiate and the relationship with the bank is crucial to reduce loan EMI burdens. There was a case in which a bank customer availed a car loan and could not repay as he had lost his job. He was struggling with car loan EMIs and contacted the bank. The bank agreed to charge only interest on a car loan for 6 months; until he got a new job. This was a win-win for both parties. The bank saved on NPAs (Non-Performing Assets) and the client’s credit score was not impacted.
See Also: Personal Loan in India
If you have lost your job or employer has cut salary, stop credit cards immediately. If you use credit cards with no income, you will land in the loan trap. It’s tempting to opt for minimum due on credit card in such a scenario, but this is a mistake. You still have to pay 2-3% interest a month on the outstanding credit card balance.
If you have FDs liquidate them and repay loans. The FD interest maybe 6.5-7% a year, while personal loan charges interest of 14-18% a year. Credit cards charge 24-36% a year. Why earn just 7% interest on FD and pay 14% in personal loan interest?
Automating loan payments inculcates financial discipline and helps repay debt. Set ECS mandate with the bank to automatically settle EMIs. Repaying loan EMIs in time reduces debt and saves you from late payment penalties. Your credit score is not impacted and you can easily avail loans.
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It’s best to repay costly loans first like personal loans and credit card dues. They charge high interest and lead you to the debt trap. Payday loans charge 1% interest a day. So, repay these loans first and save yourself from the debt trap.
If you have many loans its best to consolidate them. Consolidating all loans into a single loan means just one EMI. Consolidate home loans, personal loans, and credit cards into a single loan, giving you just one loan to track. Swap high-interest loans for low-interest ones. Instead of paying 35% on credit card interest, move to a personal loan which charges just 16% interest a year.
See Also: How To Get Personal Loan of 2 Lakhs?
Don’t take on more loans than you can bear. If you are already saddled with loans, avoid taking more of them. All EMIs and credit card repayments must not be more than 40% of take-home pay. This is an insurance policy against say a job loss. You won’t struggle with debt if you don’t have too many loans to repay.
Never go for loan settlements, no matter how tempting it seems. What is a loan settlement? It helps pay part of the dues like principal dues. You would not have to pay part or whole of the interest dues. The loan would be considered ‘settled’. This gets the loan recovery agents off your back. Sadly, your credit score is impacted for several years.
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