How To Manage Your Financial Health When Handling Multiple Loans

Right from the day we begin earning and until we retire, we have so many dreams and aspirations to fulfil, right?

And achieving each goal with our savings/investments is not always possible. That's exactly why almost all of us require loans to act as a gateway to achieve some life goals.

Whether it's about owning our dream home, going on a vacation abroad, buying a new car or availing funds for our child's higher education, loans are present to bridge the gap by providing the required funds. And that's not all. Loans often even bail us out of financial exigencies through quick disbursal of funds, isn't it?

That's why, during our work life years, there might be some phases wherein we are serving not one but two or more loans simultaneously, like a home and car loan, personal loan, gold loan, education loan etc. It¡¯s in such financial circumstances where managing these multiple loans can become a headache. So what actions can you take to remain financially fit?

Read on as we explain some smart steps to manage your financial health when handling the repayment of multiple loan accounts.

Include The Loan EMIs In Your Emergency Fund

shutterstock

Also Read: F(N)AQ: How To Be Financially Prepared Before You Start Investing

Hopefully, the last two years of the Covid pandemic have been enough to make you understand that uncertainty is the only certainty in life. Instead of living in the fear of what may happen next, isn't it better to remain financially ready for it? Especially when you are handling repayment of not just one but multiple loans.

What if you have to face adversity that harms your income inflow temporarily such as job loss, pay cut or business slowdown? Would you be able to continue to bear the responsibility of timely repaying all the EMIs during that difficult period?

For all such adverse financial exigencies or circumstances, having an adequate emergency fund can come to your rescue. The aim of this fund is to help you tackle unforeseen financial exigencies or income disruptions due to sudden job loss, severe illness, disability or other adverse life events. Ideally, its size should be equal to at least six to nine times your monthly recurring and mandatory expenses like rent, EMIs, insurance premiums, SIPs, utility bills etc.

So, if you are repaying multiple loans and wish to avoid harming your financial health or eradicating your years of savings due to a financial exigency or income disruption, then make sure you have created and maintained such a fund for your rainy days.

The emergency fund should include at least six to nine months¡¯ EMIs so that you can continue with the repayment of the loan EMIs instead of incurring late payment penalties, increased total interest cost and suffering an adverse impact on your credit score, which would otherwise have been caused by delays or defaults in loan EMIs¡¯ repayment in the absence of emergency fund.

Also Read: Stop These 5 Everyday Money Habits That Are Harming Your Credit Score

Be Wise When Deciding To Prepay The Loans With Surplus Funds

shutterstock

Also Read: With All-Time Low Home Loan Rates, Does It Make Sense To Switch Your Home Loan Lender?

When you are handling repayment of multiple loans, especially if it includes big-ticket ones like a home loan or high-cost ones like a personal loan, then receiving surplus funds can put you in a dilemma, right? Whether you should prepay the existing loan (s) or invest the surplus money.

More often than not, the answer to prepay or not lies in the opportunity cost, i.e. the price you pay for losing out on the other opportunity. Like in this case, weigh the opportunity cost by comparing the interest cost of existing loan(s) and the returns you expect to get if you instead invest the surplus.

If the interest rate levied on the loan(s) is higher than the returns you expect from the investment, then go for prepayment of the loan. Whereas if the interest rate is lower and you are fetching higher returns from investing that surplus, then go for the latter. But this decision would also depend on your priority.

Some may wish to make the loan prepayment to reduce the interest cost (especially when in the initial stage of tenure) or even close the loan in order to get rid of this liability from their head, even if the investment is fetching higher returns. So, it all boils down to your decision and financial priorities.

But make sure to weigh the two options and evaluate the opportunity cost as well.

Also, remember to factor in the prepayment charges, if any, before making the prepayment, and ensure that the interest cost savings significantly outweigh such fees/charges. And in case of taking the decision to make an investment of the surplus funds, ensure to factor in the post-tax returns.

And if you have prepared your mind to prioritize prepayment of loans and have multiple loans to choose from, always start making prepayment of the loan that is charging the highest interest rate first.

Also Read: Does It Make Sense To Take The SIP Route For Mutual Fund Investments?

Go for balance transfer whenever feasible

shutterstock

During repayment of your loans, it's always advisable to not just blindly keep on repaying the EMIs to the existing lender. And instead, keep an eye on the existing interest rates being offered by other lenders for your loan amount and credit profile.

If the rates and service terms of some other lender are better than your existing one, then you can grab the opportunity to go for a balance transfer. Exercising this option can help you derive savings in overall interest cost through shifting to a lower interest rate.

But, remember that your balance transfer request will be treated as a fresh application by the new lender, which may come with associated fees/charges like processing fees, administrative charges etc. All these can dig a hole in your pocket or even defeat the primary purpose of the balance transfer, i.e to save on overall interest cost.

That's why it's better to first enquire with your existing lender to reduce your interest rate. If the existing lender rejects your request, then go ahead with the transfer of the existing loan to the lender offering the lowest interest rate. However, ensure that the overall interest cost savings significantly outweigh the associated costs, if any.

Also Read: Does It Make Sense For Millennials To Apply For A Home Loan In Their 20s

Get The Big Ticket Loan(s) Insured

shutterstock

Also Read: Term Insurance Premiums To Pinch You More Soon - Here¡¯s What To Do

In case you are repaying a big-ticket loan, it¡¯s better to get insurance cover against it, such as home loan insurance or separate term insurance that can sufficiently pay the outstanding dues in case of your untimely demise during the loan tenure. Whereas in the absence of such insurance, chances are high that your untimely demise during the loan tenure can burden your family with the remaining repayment of the outstanding amount of the big-ticket loan.

Hence, taking insurance against such big-ticket loans becomes imperative, isn't it? So ensure to get it in case you haven't, yet. After all, you would never want to jeopardize your family¡¯s financial future with the burden of such a big-ticket loan¡¯s outstanding repayment in your absence, right?

Also Read: Tick Off This 5 Point Checklist Before Applying For Any Loan

For more interesting financial content and the latest news, click here.

Click here to download CRED