Personal loans offer quick access to funds but they also come with relatively higher interest rates as compared to its secured alternatives. If you’re servicing a personal loan, you might be looking for ways to reduce your overall repayment burden. The good news is, there are smart and practical ways to bring down the overall interest cost of your loan. In this article, we’ll walk you through three effective strategies which existing borrowers can use to reduce the interest cost on their personal loans.
1. Prepay Whenever You Have Surplus
To reduce interest burden, use your surplus cash – bonuses, tax refunds, etc. – to make prepayments. Doing so will help in bringing down the overall principal amount, leading to significant savings on the interest over time.
When making prepayment, you usually get to choose between reducing your loan EMIs and tenure. If your goal is to save more on the overall interest cost, reducing tenure would be a smarter choice. However, don’t compromise on your emergency fund or critical financial goals just to prepay your personal loan. Else, you might end up needing a high-interest loan in future, which can hurt your overall financial well-being.
2. Increase EMIs When Your Income Increases
If your income has increased and you’re comfortably managing monthly expenses, consider increasing your personal loan EMIs too. Increasing your EMI will lead to tenure reduction, which in turn cuts down the total interest cost.
For instance, if your current personal loan EMI is ₹10,000/month and you can comfortably increase it to ₹15,000, you’ll finish the loan faster and save a good chunk on the interest cost too.
However, make sure your monthly cash flow allows this comfortably. Most lenders prefer that your total EMIs remain within 50-60% of your net monthly income (NMI). So, before opting for this strategy, ensure that your total EMIs stay within this limit.
Also, don’t let the increased EMIs eat into your essential expenses and the monthly contributions towards emergency fund and crucial financial goals. Also, avoid putting yourself in a position where you’d need to take additional loans at higher rates.
3. Opt for a Personal Loan Balance Transfer (PLBT)
If your current lender isn’t offering a competitive interest rate or your loan was taken at a much higher rate, it may be time to consider transferring your personal loan. This means transferring your outstanding personal loan to another lender offering better terms such as lower interest rates, longer tenure and higher loan amount. Some lenders even offer top-up loans to their personal loan balance transfer customers. Reduction in the interest rate, especially if significant – let’s say from 15% p.a. to 11% p.a. – can result in major savings on the interest cost, especially if you also choose longer tenure during loan transfer.
Also remember that availing a balance transfer facility does not negatively affect your credit score, unlike restructuring a loan with your current bank, which can show up in your credit history. And perform a detailed cost-benefit analysis before making a loan transfer. Make sure the potential net interest cost savings through balance transfer outweigh the switching costs (processing fee, prepayment charges, etc.)
Final Thoughts
You don’t always need to live with the original loan terms. Whether through prepayments, EMI adjustments or balance transfer, there are ways to reduce interest burden on your personal loan.
