Business Other News 12 Jan 2019 How to smartly deal ...

How to smartly deal with the debt on your personal loans

Published Jan 12, 2019, 11:19 am IST
Updated Jan 12, 2019, 11:19 am IST
Online aggregators are enabling borrowers to compare and get their hands on the cheapest and transparent loan products possible.
Prepayment penalty on personal loan can increase the total cost of your loan when a customer decides to prepay a part of his loan amount or full amount before the end of loan tenure.
 Prepayment penalty on personal loan can increase the total cost of your loan when a customer decides to prepay a part of his loan amount or full amount before the end of loan tenure.

Getting yourself out of the debt trap can be an uphill task. Manish Kampani, a coding specialist, realised this first-hand when he dealt with the consequences of over-indebtedness as he landed up with more loan than he could possibly service with his available monthly cash flows. He had already taken a home loan and a car loan, and had a significant credit card debt, but the situation became worse when he had to take a fresh personal loan to meet some urgent capital need.

This father of two had never been good with managing his debt well and as was the risk, he ended up defaulting on the monthly instalment of his personal loan. Thankfully, heeding to the advice of his friends, Manish took right steps to arrest the fall in his credit score, by settling his existing loan obligations and practising financial discipline over a sustained period of time.


Process of managing personal loan starts even before taking loans

Technology has brought a revolution within the lending industry. Online aggregators are enabling borrowers to compare and get their hands on the cheapest and transparent loan products possible. Banks have also strategically streamlined their underwriting processes and have significantly reduced the turnaround time for customers. So, while some loans assure low rates, others promise quick disbursals and easy processes.

However, even before, a customer decides to take a personal loan he needs to do a thorough assessment of his ability to take and service a loan basis his income, fixed obligations and repayment capacity.  Personal loans are unsecured and hence the amount sanctioned by the lender usually depends on your income, other debts, repayment capabilities and your credit score. So, before you go ahead and apply for a personal loan, you must also contemplate over the size of your loan amount and the repayment terms to ensure that they remain within a comfort zone of your ability to repay.

In today’s time, availing a personal loan is not that difficult considering the intense competition prevailing amongst banks, NBFCs, and fintech platforms to lend, but it is the process of comparing and selecting the one that is right for you can be. Instead of giving in to the temptation of getting quick access to capital, it is imperative to be extremely careful and ensure that one takes a calculated decision to take the right loan. Total cost of a loan includes not only the interest rate but also the processing fees, prepayment penalties and other charges.

The first and foremost objective of any borrower should be to opt for a loan which offers lowest rate of interest. However, there could be many scenarios in which a borrower may opt for a higher rate of interest which could be an instant loan when the need is urgent, or opting for an overdraft facility in case of fluctuating cash flow requirements or when one would opt for a loan with a shorter lock-in-period and lower prepayment penalties. In another scenario, the borrower may be forced to opt for costlier debt, in situation of low credit score, low income or inability to meet the eligibility criteria of leading banks.

Prepayment penalty on personal loan can increase the total cost of your loan when a customer decides to prepay a part of his loan amount or full amount before the end of loan tenure. Quite often, the sooner one pays off the loan, the steeper is the penalty amount. Many lenders also have a lock-in-period of few months to up to a year or so, before which the borrower is not allowed to pay back his loan. Lenders usually apply this clause to prevent losing out on the interest payments. Thus, to avoid making the personal loan an expensive debt, opt for loans or lenders where the prepayment penalty clause is not very stringent, more so when you think that there are good chances of paying off your debt before time.

Opting for overdraft facility works the best for customers with fluctuating cash flows like in the case of salaried customers who expect to receive large bonuses at the end of the year and for self-employed customers, where fund requirements can fluctuate constantly.  In case of an overdraft facility, the borrower has to pay interest on the amount he uses at any point of time, thus helping the borrower reduce his total interest outgo and also prepay the loan without incurring prepayment penalties. These loans typically carry a slightly higher rate of interest compared to that of a regular personal loan, yet the interest savings could be significantly high over the loan tenure.

To summarise, taking a loan commensurate with your eligibility and doing a careful comparison and selection of the right loan can save you from a lot of trouble in future.

Debt management doesn’t end with taking a loan

Once you take a loan, you need to do periodic evaluation of your loan to ensure that the interest rates and other terms are best in the market.  If at any point in time, you assess that you can get a lower rate on your loan then what you are paying currently, you should consider transferring your outstanding loan amount to another bank.  The new bank you transfer your loan to, is generally willing to offer you an additional loan amount based on your recalculated loan eligibility and this might come in handy for people with existing personal loan looking to borrow more.  In this case, the outstanding loan balance is immediately paid to the old lender and the fresh loan amount is credited to the borrower’s account. However, once again, it is prudent to check the prepayment penalty clause before choosing to transfer the loan.

If you are repaying multiple loans out of your account every month, keeping a check on the different rates of interest and payment dates can be a cumbersome task. In this case, you may want to consolidate all these different payments into one loan with a single EMI on a single payment date. The chances of getting a lower interest rate increases further as all lenders offer a lower rate to borrowers who take a large value personal loan.

As you evaluate the above options,  getting a comparison and quote from online marketplaces like can help you decide whether you would save money by transferring your loan amount, taking into account the interest savings and additional cost incurred in terms of processing fees and prepayment penalties. The market place can enable you to choose the right loan offer and also facilitate the process of loan transfer from the existing bank and loan sanction/disbursal from the new bank.

Last but not the least, follow a strong financial discipline to repay your loans on time to ensure that you maintain a healthy credit score that is crucial to uphold your flexibility in transferring your loan, take a new loan or even consolidate your multiple loan accounts in future.  A healthy credit score will allow you to be in a much better position to manage your upcoming debts without jeopardizing your financial health.

All these steps and decisions together can prominently reduce the chances of landing in a distressful financial situation and can in fact make your loan a medium to fulfill your desires and taking care of your loved ones.

Guest post by Gaurav Gupta, Co-founder and CEO,