Loan is a dual-edged sword. For a majority of people, buying a home or a car without a bank loan is nearly impossible. However, the easy availability of loans, for vacations, furniture and even smartphones, has ensured that many people fall into a debt trap by taking on more loans than they can repay.
Becoming debt-free may be easier said than done, but for those who can, paying off loans ahead of schedule results in savings of substantial sums in the long run. Needless to say, it also ensures that the money saved can be invested for a better future.
There are many ways to clear loans before time. One of the simplest is to pay more than the minimum sum required to be paid each month. This reduces the loan tenure and lowers the interest outgo. This is especially beneficial when the sum involved is huge, a home loan for instance. Just by paying a few thousand more every month, the loan tenure and interest outgo can be brought down by several lakhs.
Another option is to pay one or two additional monthly instalments every year. The money received as the annual bonus or a lumpsum amount received from other sources can be used to repay the loan to reduce the outstanding loan amount and save on interest costs.
Another strategy is to prioritise loans with higher interest rates. Especially, if someone has outstanding credit card dues, it makes sense to clear the debt as early as possible. By repaying loans with a higher interest rate, one can minimise the overall interest cost and save money in the long term. There is also an option to replace loans with higher interest rates with those having a lower rate of interest. Especially for someone having a decent CIBIL score, banks and finance companies are open to offering loans at lower interest rates. A difference of one or even half a percentage can lead to a significant reduction in interest outgo.
A golden rule is to spend less than you earn and invest the remaining sum in good financial instruments. Seeking expert financial advice to find ways to cut avoidable expenses, repay loans earlier, and increase savings and investments can go a long way in securing one’s financial future and also peace of mind.