Planning for short tenure loan repayment

Loans | admin | August 15, 2011 at 9:44 am

Borrowers who have availed short tenure loans often reel under extreme financial pressure. A huge chunk of their monthly income goes towards home loan repayment. Job cuts and pay cuts are a common phenomenon post global meltdown and cost of living has gone up owing to inflation.

In such a scenario, the borrower faces a serious financial crisis as home loan repayments are not his only monthly commitments . How does a borrower plan a short tenure loan repayment effectively? Bear in mind that your EMI outflow doesn't remain constant over the tenure of the loan. Be it floating or fixed (can be reset by the lender), the EMI that you must dole out after 2 years may be quite high compared to what you are paying today.

Keep a cushion for this increase. Sometimes, the borrower's salary may not increase at this rate and managing finances becomes tedious. Home loan repayments form a large chunk of your salary. But this is not your only commitment. Setting aside money for children's education, marriage and retirement planning are crucial. One must start early for retirement planning and invest systematically.

Only then you can benefit from the power of compounding and earn larger return. When planning finances do not overlook the need to save for emergencies such as hospitaliation and health care. Anticipate greater money squeeze and desist from lavish expenditure. Avoid acquiring newer debts. Newer debts could drag you into deeper financial crisis where meeting even regular monthly expenses become a challenge. Avoid using credit cards.

Defaulting on credit card loans can prove very expensive. Pay off higher interest rate debts first. This way your savings will be greater by decreasing first the debt that continues to grow at a faster rate due to the higher rate of interest. If you do not make enough money to repay all debts, prioritise your debts.

Borrow as little as possible . This way your EMI burden will be less. If you feel it is difficult to make regular EMI repayments , contact the lender. Explain to him your financial crisis. See if he can reduce your rate of interest. Otherwise increasing the tenure of the loan is the simplest way out of the crisis. This way the EMI comes down.

Source: Economic Times