What to Do If Existing Loan Obligations Constitute 50% of Your In-hand Income?

What to Do If Existing Loan Obligations Constitute 50% of Your In-hand Income?

Last Updated : July 31, 2020, 8:06 p.m.

Your financial state changes drastically after you take a loan as you will be paying a fixed installment every month for the time it is taken. Your saving remains lower from the time when you didn’t have to pay any loan installments. It can reduce even further if you are servicing EMIs of more than one loan. Given the uncertain nature of life, it’s important we control the controllable so that we can maintain our dignity by not asking others to help us. With multiple loans, the total loan obligations can well be around 50% of your in-hand income. If that is the case, you might find it hard to sustain if you face an unforeseen contingency anytime during the loan tenure. You not only need to pay the EMI of these loans but also take stock of normal household expenses, leaving you with very little for other stuff. So, what should you do to take you through in such situations? Well, the suggestions are highlighted in this post. Read on to know the same.

Keep Your Credit Card Spends to as Low as Possible

With existing loan obligations in place, you will do well to spend very little with your credit card. This will leave you with enough to pay the existing loan obligations plus some more for any contingency you may face. In case you go the other way round, you could raise the credit card bill a bit too much for comfort. And, if you are thinking of paying just the minimum due, which accounts for nearly 5% of the outstanding balance in a billing cycle, you could be in big trouble. Yes, credit card companies let you avoid late payment charges by just paying the minimum due on or before the due date. But in return, you will need to pay interest on the unpaid balance at a hefty rate of 2.50%-3.50% per month, going upto 30%-45% a year. Such an interest rate will also apply when you pay more than the minimum due but below the total due. So, spend with your credit card to an extent that you can pay the total due easily without putting a strain on your finances.

Avoid Your Temptation to Buy iPhone & Other Consumer Durables via Loans

With total loan obligations constituting 50% of your in-hand income, you don’t leave much scope for a fresh loan. But still, there can be space for a loan to buy an aspirational product like an iPhone or any other consumer durable. We say ‘No’ to buying iPhones on a loan given that the money you pay towards a loan will be much more than the amount you may get by selling it a year or two later. Also, see whether you have the savings to buy other consumer durables. If so, use that to buy the same. With this strategy also, you can have something to deal with contingencies.

Save from Your Daily Routine

When you have more than one loan obligation, it becomes important to save from the daily routine. There could always be some expenses accounting for a significant chunk of your income. Figure those out and show restraint on such spends. This way, you would keep something to deal with emergencies should you face them.

Invest in the Right Financial Tool

Spending little on the credit card and saying No to unnecessary expenses will leave you with some to utilize later. To ensure your savings yield high with time, you can put them in a financial tool that you can relate to given the kind of individual you are. Till the time you are paying off the loan, it will be good earmark funds towards banking products such as recurring deposits, fixed deposits , etc. These products yield stable returns for you. Equity investments are also good but may not be much of a fruitful proposition if you are keeping money here for the short-term purpose. Maybe when any of the loans is over, you can invest some in equity mutual funds too. But your risk-appetite has to be higher and the investment horizon needs to be longer.

Look for a Suitable Loan Refinancing Option

You can also reduce your debt-income ratio from 50% at the moment, using a suitable loan refinancing option. Loan refinancing could be in the form of a balance transfer or part payment. In case you find a lender that can allow you to transfer the outstanding loan balance to it at a lower rate of interest, grab the deal. Ensure the difference in the rate of interest remains a minimum of 3%-5% in the case of a running personal loan. In case it’s about a long-term loan such as a home loan, even a difference of 0.25%-0.50% in the interest rate can lead to substantial savings over time. With a balance transfer, both your EMI and interest outgo can reduce.

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