Having trouble paying off expensive loans? Better manage your credit EMIs with these steps

Financial stress or hardship can force many borrowers to miss loan repayments. Since missing EMI repayments can result in large penalties for unpaid fees, this can further worsen the borrower’s debt burden. Failure to pay EMIs by the due date also adversely affects the borrower’s creditworthiness and future eligibility for credit cards and loans.

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

Redemption of fixed income investments not earmarked for important financial goals

Fixed income investments such as time deposits, term deposits, debt securities, etc. typically produce lower returns over the long term than other asset classes, especially stocks. Additionally, returns on fixed-income investments are typically much lower than interest rates on low-cost loan options. Therefore, closing or redeeming fixed income instruments not earmarked for critical financial goals should be the first step for those unable to repay EMIs on time.

If possible, opt for a balance transfer

Transferring existing loans to other lenders at a lower interest rate can help borrowers reduce their overall interest expense and EMI burden. Borrowers can further reduce this EMI burden by asking the new lender to offer a longer loan term from the remaining term of their existing loan. While a longer term increases their interest costs, later borrowers can lower their overall interest costs by prepaying the loan when their financial position improves.

Borrowers need to keep in mind that the new lender would consider balance transfer requests as new loan applications and would therefore charge processing fees, administration fees and other fees incurred during a new loan application. Borrowers should only elect to transfer a balance if the total savings in interest costs significantly exceed the associated costs.

Use the emergency fund for EMI payback

The main goal of maintaining an emergency fund is to keep a liquid war chest ready to deal with unforeseen financial emergencies or interruptions in income due to illness, job loss, disability, etc. Ideally, this fund should be large enough to cover unavoidable monthly expenses such as EMIs, SIPs, rent, credit card bills, utility bills, daily expenses, etc. for at least six months. Therefore, borrowers must maintain an adequate contingency fund for EMI repayments.

Go to debt consolidation

Debt consolidation allows borrowers with multiple loans to consolidate their existing loans at higher interest rates by taking out one or two new loans at a lower interest rate. The loan proceeds from the new loans can be used to pay off the older loans drawn at higher interest rates.

For example, home loan borrowers who are having trouble paying off their personal loan or other more expensive loans can use a booster loan to pay off the more expensive ones. Booster loans are usually available at a much lower interest rate and with longer terms than most other types of loans. Similarly, card users who cannot repay credit card fees by the due date can take out a personal loan to help them do so.

Personal loan interest rates are much lower than the financing charges (23-49% pa) charged on unpaid credit card fees. The term of the personal loan is usually up to 5 years, with some lenders offering terms of up to 7 years. Therefore, a personal loan can allow financially stressed card users to repay the unpaid credit card bills in smaller tranches in the form of EMIs according to their ability to repay.

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