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How to Reduce Your Personal Loan Burden Without Affecting Your Wallet?

Highlights

  • Seeking to reduce interest burden on personal loan? Opt for balance transfer at lower rates
  • Liquidation of low yield investments can also reduce the burden greatly

It won’t be wrong to say that many take personal loans to unleash the happy moments of marriage and travel or to tide over the uncertainties of medical emergency and other contingencies. That sums up the utility of a personal loan in one’s life. But personal loans can come at higher rates as you can avail the same without providing any security. The higher rates could increase the repayment burden for you. It can get reduced, though, and thus bring a smile on your face. So, if you are finding it hard to make the loan payments, it’s time you ease the burden by taking a cue from the recommendations highlighted in this article.

Request the Lender to Lower the Interest Rate

You should ask the lender to reduce the rates. The lender can do so if you have a solid repayment track with no spot of default. The reduction in rates will decrease the Equated Monthly Installment (EMI) and the interest outgo.

Opt for a Balance Transfer If the Existing Lender Refuses to Lower the Rates

If the existing lender does not lower the interest rates, it’s time you search outside and find a lender that can take over your existing loan at lower rates. This is a common practice among borrowers to reduce the repayment burden. However, this can come with a fee at up to 2-4% of the transferred balance. So, the key lies in getting the deal at the lowest fee. If possible, look for zero fee offers to maximize your savings. Let’s check out the example below to understand the benefits of the balance transfer.

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Example – Ravi Katyal availed a 5-year personal loan of ₹5 lakhs 2 years ago. He has been paying an EMI of ₹12,426 of at an interest rate of 17% per annum. If Ravi continues to pay at this rate, he would end up paying a total interest of ₹2,45,577 by the time the loan gets over. He has so far paid an interest of ₹1,46,768 and is left with an outstanding balance of ₹3,48,536. If Ravi gets a balance transfer deal at 13% given his solid repayment track, how much will he benefit from the transaction? Let’s find out in the table below.

S.NoRepayment AspectsAmount (In ₹)
1Original Loan5,00,000
2Present EMI @17%12426
3Interest Paid Till Now1,46,768
4Interest to be Paid Over 5 Years @17%2,45,577
5Outstanding Loan Balance After 2 Years3,48,536
6New EMI @13%11744
7Savings in the EMI682
8Interest to be Paid Over the Remaining 3 Years74232
9Interest Paid Till Now + Interest to be Paid Over the Remaining 3 Years2,21,000
10Savings (4-9)24577

Note – The mathematics shown in the table would apply to the first case as well, if the existing lender agrees to reduce the interest rates.

If Ravi grabs a zero balance transfer fee offer, the savings of ₹24,577 would be kept in tact. However, if the new lender charges a fee, then Ravi must check the savings to be made after paying the charges. Only when the savings post deduction of the fee comes substantial shall he avail the balance transfer option.

Formalities Required in Personal Loan Balance Transfer

The balance transfer is executed by completing the necessary formalities.

  • Request the existing lender to issue you a No-objection Certificate (NOC) with respect to the loan transfer to the new lender
  • Also ask the existing lender to present you with a statement showing the loan paid so far, the outstanding loan balance, the rate of interest charged, the remaining tenure left, etc.
  • Present these documents to the new lender to process your balance transfer application
  • The new lender would go through the repayment track before approving this loan arrangement
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Pay from Your Low Yield Investments

You may have invested in products such as fixed deposits, recurring deposits, etc. The average return from these products could be around 6%-8% per annum, hardly enough to deal with the prevailing inflationary scenario. The returns shorten further post the tax deduction. So, it would be advisable to take something out of these investments to pay a certain portion of the loan to reduce the outstanding balance and the interest outgo.

Example – You are investing ₹5,000 in a 5-year recurring deposit on a monthly basis. The maturity amount would be around ₹3.5 lakhs on a total investment of ₹3 lakhs at an assumed return of 6.75% per annum. Instead, if you have been investing the same ₹5,000 monthly in mutual funds via a Systematic Investment Plan (SIP), you could have hoped for a corpus of ₹4,24,017 over 5 years, assuming an annual return of 13%.

Assuming your RD to have completed 4 years, the approximate corpus would be around ₹2.7 lakhs. You can thus take out some of the RD proceeds to reduce the personal loan outstanding and the interest payment.

If you are servicing a 5-year personal loan of ₹4.5 lakhs at 15% interest rate, you must be paying an EMI of ₹10,705, which could lead to a total interest payment of ₹1,92,328 over the entire debt course. Now that you have paid the EMIs for 2 years, the outstanding balance stands at ₹3,08,823. If you pay ₹70,000 out of the RD proceeds, the loan would reduce to ₹2,38,823. The benefit of the reduced loan amount is shown in the table below.

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S.NoRepayment AspectsAmount (In ₹)
1Original Loan4,50,000
2Present EMI10705
3Interest Paid Till Now1,15,755
4Interest to be Paid Over 5 Years @15%1,92,328
5Outstanding Loan Balance After 2 Years3,08,823
6New Outstanding Loan Balance Post the Payment of 70,000 from RD2,38,823
7New EMI8279
8Savings in the EMI2426
9Interest to be Paid Over the Remaining 3 Years59217
10Interest Paid Till Now + Interest to be Paid Over the Remaining 3 Years1,74,972
11Savings (4-10)17356

Tips for Prospective Borrowers

The tips suggested above were for customers who are already servicing personal loans. For those who are yet to avail this loan, they must compare the different interest rates before choosing the one that lowers the repayment burden. They can gauge the effect of interest rates by checking the personal loan EMI calculator, which sums up the repayment in a few seconds. The calculator is available online to make it easy for you. Just enter the loan amount, interest rate and tenure tenure in the calculator, which will then show the EMI and interest outgo over the course of a loan.

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  • Personal Loan Interest Rates October 2019
    Bajaj Finserv10.99% - 16.00%
    Fullerton India14.00% - 33.00%
    HDFC Bank11.25% - 21.45%
    ICICI Bank10.99% - 18.40%
    IndusInd Bank10.99% - 16.00%
    Kotak Bank10.99% - 20.99%
    RBL13.00% - 18.00%
    Standard Chartered Bank11.50% - 18.00%
    Tata Capital10.99% - 18.00%