How to Avoid Paying High Interest Rates on Loans – Forbes Advisor INDIA
With the variety of borrowing options available to borrowers today, borrowing money is becoming increasingly popular. There are different types of loans that borrowers can choose from based on their needs, including personal loans, home equity loans, auto loans, and others. Lenders now even offer instant loans that take just five minutes to pay out. Repayment, on the other hand, is a whole different story. When choosing a loan, you should consider a few factors that will make loan repayment easier and more efficient.
Borrowers choose loans for a variety of reasons. They often take out various types of loans for the purchase of real estate or vehicles, construction, education, starting and running a business, and so on. Personal loans are usually used to meet the borrower’s more immediate needs, such as: B. Weddings, travel and medical emergencies. People have used them for a variety of purposes – from consolidating their debts to avoiding bankruptcy or paying off unexpected expenses.
Loans are a popular option for borrowers as interest rates are very cheap today. Nowadays, they are also becoming easier to apply for, which means they can avoid the lengthy application process. Borrowers today have access to a variety of repayment plans that can benefit those who have erratic income or unpredictable expenses.
Regardless of the type of loan, borrowers need to understand key lending-related terminologies.
Your interest rates are a portion of the loan repayment amount that you pay the lender as an incentive to borrow. Interest rates are calculated each year and depend on the type of loan and its duration. The rate is usually expressed as a percentage, making it easy to understand. Some lenders offer interest rates that are fixed for the life of the loan, while others start with a low interest rate and then make it variable or market-linked.
The processing fee is the money a lender charges for administrative costs such as underwriting and processing the loan application. Lenders are allowed to charge this fee as it covers the cost of running their business. Processing fees are sometimes negotiable and may vary depending on the type of loan applied for. Some lenders may charge a flat fee, while others charge a small percentage of the loan amount.
A lender’s repayment policy is a set of rules that determine the terms of a loan’s repayment. These guidelines can be quite complicated and can vary depending on the type of loan and the lender. Hence, it is always advisable to read them thoroughly before deciding to avail the loan.
The most common types of loans are secured loans, which require some collateral to be provided to cover the risk of you not repaying. The collateral for a secured loan can include property, stock, or other assets that can be used to pay off the debt if you default on payments. Unsecured loans are those that are granted without collateral. The interest rate on an unsecured loan is typically higher than a secured loan because there is no collateral to cover potential losses in the event of a default.
When you apply for a loan, the lender will ask you to provide the term or term of the loan. The term is the period of time in which you have to repay your loan. The term can be expressed in years, months, weeks or days depending on the requirements of the lender and your preferences.
Loan amortization is the split of payments made to pay off the principal and interest on a loan. Payments vary depending on the type of loan you have. The payment schedule for an amortizing loan is fixed and is determined by the amount borrowed, the interest rate, and the length of the borrowing period.
A credit score is a number that indicates a person’s creditworthiness. A credit score is usually based on a statistical analysis of your past borrowing and repayment history. The higher the score, the better the chance of being approved for a new loan or line of credit.
Increasing the prime rate and its impact on borrowers
Another concept borrowers need to be aware of that can also affect their interest rates is the prime rate. Prime rates are interest rates set by the country’s central bank. For example, the repo rate is the rate at which a country’s banks borrow money from the central bank.
Why is that important?
In May 2022, the Reserve Bank of India (RBI) increased the repo rate by 40 basis points (100 basis points equals 1%). This is the first rate hike in more than four years. The RBI hiked the repo rate to curb inflationary pressures. The move will also help protect the Indian rupee from further depreciation against the dollar.
Repo set revisions are not very frequent. However, any increase in the repo rate will have an impact on borrowers as it will increase their borrowing costs and push up their EMIs. Only variable rate loans are affected by the change.
Why do borrowers pay high interest rates?
Interest is the cost of borrowing. They are usually expressed as a percentage of the amount borrowed and are paid in addition to the principal amount. The interest rate makes borrowing money expensive or cheap.
Interest rates are an important factor to consider when applying for a loan. There are many reasons why interest rates can be high and they can be due to the risk associated with the borrower.
Interest rates on loans can also vary depending on the type of loan, e.g. B. secured or unsecured, and the provision, z. B. a bank or other lender vary.
Interest rates on loans can sometimes skyrocket when borrowers can’t keep up with their monthly payments. For example, a person who takes out a personal loan for a wedding and fails to repay on time ends up paying back a higher interest rate on the total outstanding amount as a penalty.
This is how you select and structure your loan efficiently
First and foremost, it is important to find a loan that has a low interest rate. This will save you money in the long run and keep your finances in order. When choosing a type of loan, you can consider the following factors:
Consider multiple lenders
You may consider taking out a loan from new-age fintechs along with typical banks or financial institutions, depending on who offers loans at a lower interest rate.
Employee Provident Fund (EPFO)
One possibility is to leave the age corpus maintained at the EPFO. There is no repayment required as this will be done from your own funds, but remember that you are diving into your retirement body and this should only be done as an extreme step.
Public Provident Fund (PPF)
The PPF is a retirement product that offers both tax benefits and a long-term savings opportunity. You can apply for a personal loan against the balance of the PPF account between the 3rdapprox until 6th year after account opening and start from the 7thth year on. Loans taken against PPF have a very low interest rate (1% above the PPF rate) and a 3-year term.
Gold or real estate loans
Taking out a gold loan is a great way to raise money for emergencies. Gold loans are short-term loans that are repaid in installments over a period of time or all at once at the end of the term. They are typically offered by banks and other financial institutions that take gold as collateral. They offer a lower interest rate than most other types of loans because the underlying asset, gold, is highly liquid.
People often take out loans against their fixed deposits. This is a way to temporarily bridge liquidity shortfalls without having to break a long-term deposit and losing the opportunity for interest income. The interest on such loans is a small premium over the FD interest rate.
The insurance can be used as security for taking out a loan. If you take out a loan against your insurance policy, the interest rate is lower than if you took out a loan on your home. But the downside to this is that your insurance policy must be with an insurer that allows credit against their policies and has a good credit rating.
Structure your repayment process
The next step is to structure your loan and bring discipline to the repayment process. This involves treating the following factors:
Set up an automatic payment
Automatic direct debit is a convenient way to automatically pay your loan interest. You can set up automatic debiting through online banking or the bank’s mobile app. You can also set up an automatic charge by contacting your credit provider. However, keep in mind that if the account balance is insufficient on the debit date, you will be charged a large penalty.
Consolidate your higher-interest loans
Consolidating your higher-interest loans into a new loan to lower your interest rate allows you to get rid of all the fees and other overheads associated with multiple loans. This can help you save money on monthly payments through a lower interest rate.
Borrow as needed
Borrowers need to plan their expenses and income in advance so they don’t borrow when they don’t need to. They can make a list of all their expenses and track them so they know where their monthly repayments are going. A good tip is to pay off credit cards in full before the due date as much as possible, since most credit card companies charge high interest on overdue accounts.
Evaluate cash flows
Cash flows are the most important factor in deciding the loan term. The borrower should evaluate their cash flows before deciding on the loan term, interest rates, etc. This ensures that they do not fall into a debt trap and can easily repay the loan on time.
A line of credit or loan can be a great way to help you meet your financial goals, but it’s important to understand the risks before you sign the dotted line. The first thing borrowers need to consider is whether they can afford their principal and interest payments. If not, they should consider other avenues to meet their financial needs.
They should also think about how long they will need the money. A shorter-term loan may result in lower interest expense than a longer-term one, but it also means borrowers have much less time to pay it back in full. Finally, borrowers can find out if they qualify for government programs or schemes that allow them to borrow at lower interest rates and pay off their debt faster.