5 Tips to be Debt Free: Strategies to Accelerate Debt Repayment
Fintech advancements have made credit facilities more accessible than ever. Be it a personal loan, bike loan, credit card, or any other credit, you can now get funds in a matter of hours. While availing credit has become more accessible, it is crucial to remember that timely repayment is your responsibility.
It ensures continued easy access to credit facilities and helps avoid penalties. Thankfully, repaying your debt is simple if you have a clear plan. In fact, with a repayment strategy, you can close your loan earlier and save money too. Early repayment reduces your burden, enabling you to utilise the freed funds for financial growth.
There are many ways through which you can get debt-free quickly. This includes budgeting, personal loan balance transfer, a debt consolidation loan and more. Continue reading to learn more about these strategies for accelerated debt repayment.
Inquire for Shorter Tenure
If you want to wrap up your loan quickly, choose a shorter tenure. You can contact your lender for the same, and check if they offer a repayment timeline that suits your goals. It is worth noting that a shorter tenure leads to a higher EMI.
This is because lower tenure means fewer instalments, resulting in higher monthly payments. But, in the long run, you can save more on the interest amount paid on your personal, home, or other loans. As such, you can rely on this option with an increase in your earnings.
Plan for Prepayment
Another strategy to speed up your loan repayment is to prepay the loan. With any surplus funds, you can redirect the amount towards a partial-prepayment. This when you pay a chunk of the outstanding principal amount in advance. Doing so reduces the interest payable on the loan, and can also work to decrease the EMIs as well.
Here, you can make either a part-prepayment or an entire prepayment, also known as foreclosure. The processes involved for part and full prepayment are significantly different. In part-prepayment, you direct your surplus amount to reduce the outstanding principal.
With a reduced loan amount, you can pay EMIs at a shorter frequency, resulting in a shorter tenure. But in foreclosure, you must pay the entire outstanding amount and close your account. The best way to achieve either of these is by creating a budget and planning for it in advance.
You can use a loan EMI calculator that will give you an estimate of the EMI, and access to the amortisation schedule. Through this, you can gauge when prepayment would be the most feasible and plan accordingly. Remember to consider the fee that the lender will levy to ensure that you save more than you pay.
Set a Structured Repayment Plan
With many credit accounts, managing finances can be complex. But a structured repayment plan can make it easier, helping you be debt-free quickly. You can use avalanche or snowball methods to manage the repayment of multiple loans.
Both methods suggest that you pay the minimum instalment of all your credits except one. You then use the extra funds to pay a larger amount of the remaining one. In the avalanche method, you pay the larger amount on the loan with the highest interest rate.
As such, you close the largest loan account first, gradually moving towards the smaller loans. The snowball strategy suggests the opposite. You start by closing the loan account with the smallest amount and moving up.
The avalanche method is a better option if you have a higher disposable income. But the snowball method is better for steady-income borrowers. Managing your EMIs in either of these ways ensures that your funds move smartly to help you save and repay earlier than expected.
Get a Debt Consolidation Loan
Another way to accelerate your debt repayment is to take a debt consolidation loan. You can use this loan to settle other debts, such as personal loans or credit cards. Since a debt consolidation loan can have lower interest, you can significantly reduce your liability.
With a debt consolidation loan, your repayment becomes very easy and manageable as you only have to worry about one instalment and not multiple. For example, suppose you have four debt accounts totalling ₹50,000, and the interest for them is above 15%.
By taking a debt consolidation loan, you can pay off (foreclose) all your debt at one go. After that, you only have to make one monthly repayment instalment instead of four. This streamlines your repayment and also helps you save on interest charges.
The amount you save can be put towards the repayment of this debt, further accelerating your repayment.
Opt for Balance Transfer Facility
All banks and financial institutes have different rates of interest, and you can switch to a lower interest with a balance transfer option. With a home or personal loan balance transfer, you can switch to a lender with a nominal change to reduce your EMI amount and/or tenure and accelerate repayment.
You can transfer your outstanding balance to any financial institution offering the option. Be it a home loan or personal loan, balance transfer is offered by a majority of institutions.
You can opt for a home or personal loan balance transfer in a few steps and start enjoying its benefits. To choose a balance transfer, follow these steps:
- Step 1: Compare the interest rates of the current lender with other lenders
- Step 2: Apply for a loan balance transfer with the new bank or NBFC by providing required details
- Step 3: Apply for NOC with the current lender and complete the process
Besides the above, another option to try is paying extra instalments when possible. By paying additional EMIs in a year, you can reduce the tenure of your loan.
With these tips, you can have a better plan to close your debt with discipline and earlier than expected. Remember to consider the costs you pay in opting for any of the above tips. Compare this with the amount you save to make the right decision.
Paying a loan faster can save your hard-earned money in the long run and gives you peace of mind. Moreover, repayment discipline improves your creditworthiness. This, in turn, makes it easier to get affordable credit in future.