Best Practices for Managing Multiple Loan EMIs
Balancing finances can be a juggling act, especially when you have multiple loan commitments. Suppose you’re paying off a home loan—a significant responsibility on its own. But life happens, and you take out a personal loan to manage unexpected expenses.
Now, you have to manage both loans without letting the EMIs disrupt your day-to-day expenses. It’s essential to handle these commitments wisely. So, here are some best practices for budgeting your loan EMIs effectively.
Assess your financial situation
Start by understanding your financial position to set realistic EMI budgets.
• List income sources: Include salary, rental income or any side earnings.
• Calculate fixed and variable expenses: Take into account all the monthly expenses. This includes rent, groceries, utilities and savings.
• Analyse debt obligations: List all outstanding loans, including their EMIs, interest rates and due dates.
Create a realistic budget
Budgeting for both regular expenses and EMIs is essential to stay on top of payments.
• Categorise expenses: Separate essential (groceries, utilities) from discretionary (entertainment, dining out) expenses.
• Set EMI as a fixed expense: Allocate a portion of your monthly income strictly for EMI payments.
• Adjust spending: Limit discretionary expenses, especially if EMIs take up a large portion of your income.
Prioritise high-interest loans
Repaying high-interest loans first can save significantly on interest costs and help pay off debts faster.
• List loans by interest rate: Arrange your loans from highest to lowest interest rates.
• Increase repayment on high-interest loans: Allocate extra funds to the loans with the highest interest, paying minimums on others if possible.
• Monitor progress: Review periodically to adjust payments as debts decrease.
Consider loan consolidation
Consolidating multiple loans into one can simplify repayments and often secure a lower interest rate.
• Review consolidation options: Look for offers with lower interest rates than your existing loans.
• Calculate total interest savings: Ensure that the consolidated loan provides an interest reduction.
• Seek professional advice: Consult with a financial advisor or bank representative for guidance.
Make regular prepayments
You can make additional payments toward the principal amount of a loan to shorten the tenure and reduce interest charges.
• Set aside extra funds for prepayments: Allocate part of bonuses or tax refunds toward loan prepayments.
• Check prepayment terms: Some lenders may have charges on prepayments. So, ensure it’s cost-effective before proceeding.
• Track impact on loan tenure: Observe how prepayments reduce both the tenure and total interest.
Maintain a good credit score
A good credit score can increase your eligibility for favourable loan terms.
• Timely payments: Ensure all EMIs and credit card dues are paid on time to maintain a high score.
• Limit new credit: Avoid taking on new debt while managing existing loans.
• Review your credit report regularly: Check your report for errors or discrepancies and resolve any issues promptly.
Set up automatic payments
Automating EMI payments is a reliable way to ensure timely payments and maintain a good credit record.
• Schedule auto-debits: Use your bank’s auto-debit facility to set up automatic EMI payments from your account.
• Ensure sufficient balance: Make sure there are enough funds in the account to cover EMIs on due dates.
• Track payments: Review bank statements periodically to confirm payments are deducted as scheduled.
Conclusion
You should only consider taking another loan when you’re confident in managing existing EMIs comfortably. A new loan should align with your financial goals, not add undue stress. If you’re uncertain about balancing multiple loans or managing repayments, talk to people who have managed similar situations or consult an expert. They offer valuable insights into debt management. It can help you optimise your repayment strategy and ensure you’re making financially sound decisions.
