How to Avoid Paying High Interest Rates on Loans – Forbes Advisor INDIA
With the wide variety of credit options available to borrowers today, borrowing money is becoming increasingly popular. There are different types of loans that borrowers can choose from depending on their needs, including personal loans, home equity loans, car loans, and others. Today, lenders are even offering instant loans that only take five minutes to disburse. Reimbursement, on the other hand, is a whole different story. When it comes to choosing a loan, you need to consider some factors that make loan repayment easier and more efficient.
Borrowers opt for loans for various reasons. They often take out different types of loans for the purchase of property or a vehicle, construction, education, starting and running a business, etc. Personal loans are typically used to meet the borrower’s most immediate needs, such as weddings, travel, and medical emergencies. People use them for a variety of purposes, from consolidating their debts to preventing bankruptcy or paying for unexpected expenses.
Loans are a popular option for borrowers as interest rates are very favorable today. These days it is also getting easier to apply which means they skip the long application process. Borrowers today have access to a variety of repayment plans, which can benefit those with irregular incomes or unpredictable expenses.
Regardless of the nature of the loan, borrowers need to understand the key terminologies associated with the loan.
Your interest rates are part of the loan repayment amount you pay the lender as an incentive to borrow money. Interest rates are calculated annually and depend on the type of loan and its term. The rate is usually expressed as a percentage, so it can be easily understood. Some lenders offer fixed interest rates for the life of the loan, while others offer a low initial interest rate and then make it variable or market-linked.
Processing fees are the money a lender charges for administrative costs, such as underwriting and processing the loan application. Lenders are allowed to charge these fees as they cover the cost of running their business. Processing fees are sometimes negotiable and may vary depending on the type of loan you are applying for. Some lenders may have fixed fees while others may charge a small percentage of the loan amount.
A lender’s repayment policy is a set of rules that establishes the repayment terms of a loan. These policies can be quite complicated and can vary by loan type and lender. Hence, it is always wise to read them carefully before deciding to avail the loan.
The most common types of loans are secured loans, for which certain guarantees must be presented to cover the risk that you do not repay. Collateral for a secured loan can include property, stock, or other assets that can be used to repay debt in the event of default. Unsecured loans are those granted without collateral. The interest rate for an unsecured loan will generally be higher than for a secured loan because there is no collateral to offset potential losses in the event of default.
When you apply for a loan, the lender will ask you to specify the length or term of the loan. The term is the period of time over which you will have to repay your loan. The term can be expressed in years, months, weeks or days depending on the lender’s requirements and your preferences.
Loan amortization is the distribution of payments made to repay the principal and interest of a loan. Payments vary depending on the type of loan you have. The repayment schedule for an amortizing loan will be fixed and determined by the amount borrowed, the interest rate and the term for which it was borrowed.
A credit score is a number that indicates a person’s creditworthiness. A credit score is usually based on a statistical analysis of your borrowing and repayment history. The higher the score, the better the chances of approval for new loans or lines of credit.
Increase in the policy rate and its implications for borrowers
Another concept that borrowers should be aware of, which can also affect their interest rates, is the key rate. Policy rates are the interest rates specified by the Central Bank of the country. For example, the Repo rate is the rate at which banks in a country borrow money from the central bank.
Why is this important?
In May 2022, the Reserve Bank of India (RBI) raised the repo rate by 40 basis points (100 basis points equals 1%). This is the first increase in more than four years. The RBI raised the repo rate to curb inflationary pressures. The move will also help protect the Indian rupee against further depreciation against the dollar.
Repo rate reviews are not very frequent. However, any increase in the repo rate will have implications for borrowers as it will increase the cost of their loans and increase their EMIs. Only variable rate loans will be affected by the change.
Why do borrowers incur high interest rates?
Interest rates are the cost of borrowing. They are usually expressed as a percentage of the amount borrowed and they are paid in addition to the principal amount. The rate of interest is what 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 may be high, and they may be a result of the risk associated with the borrower.
Interest rates on loans can also vary depending on the type of loan, such as secured or unsecured, and the person providing it, such as a bank or other lender.
Interest payable on loans can sometimes suddenly increase when borrowers are unable to meet their monthly payments. For example, a person who takes out a personal loan for a wedding and does not repay on time ends up repaying at a higher interest rate on the overall outstanding amount as a penalty.
How to choose and structure your loan effectively
The first thing to do is find a low interest loan. It will help you save money in the long run and keep your finances in order. When choosing a type of loan, you can keep the following factors in mind:
Consider multiple lenders
You can consider taking out a loan from new-age fintechs as well as typical banks or financial institutions, depending on who offers loans at a lower interest rate.
Employees Provident Fund (EPFO)
One option is to withdraw from the corpus of pensions maintained with the EPFO. There is no repayment required as it comes from his balance, but keep in mind that you are tapping into your retirement corpus and this should only be done to the extreme.
Public Provident Fund (PPF)
The PPF is a retirement product that has been designed to provide tax advantages as well as a long-term savings opportunity. You can benefit from a personal loan on the balance of the PPF account between 3rd at 6e year after opening the account and start withdrawing partially from the 7e from the year. Loans contracted against PPF have a very low interest rate (1% above the PPF rate) and a repayment term of 3 years.
Gold or home loans
Taking out a gold loan is a great way to get cash for emergencies. Gold loans are short-term loans, which are repaid in installments over a period of time or all at once at the end of the term. They are usually offered by banks and other financial institutions that accept gold as collateral. They offer a lower interest rate than most other types of loans because the underlying asset, gold, is very liquid.
People often take out loans on their term deposits. It’s a way to temporarily overcome cash shortages without having to break a long-term deposit and lose the opportunity to earn interest. The interest on these loans is a small premium over the FD interest rate.
Insurance can be used as collateral to take out a loan. If you take out a loan on your insurance policy, the interest rate will be lower than if you take out a loan on your home. But the downside is that your insurance policy will need to be with an insurer that allows loans against their policies and has a good credit rating.
Structure your reimbursement process
The next thing to do is to structure your loan and bring discipline to the repayment process. This includes consideration of the factors below:
Set up automatic payment
Direct debit is a convenient way to have your loan interest paid automatically. You can set up direct debit via online banking or the bank’s mobile app. You can also set up direct debit by contacting your loan provider. However, keep in mind that in case of insufficient account balance on the debit date, you will be charged a heavy penalty.
Consolidate your higher interest loans
When you consolidate your higher interest rate loans into one new loan to lower your interest rate, you can get rid of all the fees and other overheads associated with multiple loans. This can help you save money on monthly payments with a lower interest rate.
Borrow according to your needs
Borrowers need to plan their expenses and income in advance so they don’t borrow when they don’t need it. They can make a list of all their expenses and keep track of them so they know what their monthly repayments are for. A good tip is to pay off credit cards in full, before the due date, as much as possible, as most credit card companies charge high interest rates on overdue accounts.
Assess cash flow
Cash flow is the most important factor when choosing the term of the loan. The borrower should assess their cash flow before committing the term of the loan, interest rates, etc. This will ensure that they do not fall into debt trap and can repay the loan easily on time.
A line of credit or loan can be a great way to help you reach your financial goals, but it’s important to understand the risks before you sign on the dotted line. The first thing borrowers need to think about is whether they can repay the principal and pay the interest. If not, they should consider other ways 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 loan, but it also means borrowers will have much less time to repay in full. Finally, borrowers can find out if they are eligible for any government schemes or programs through which they could qualify for loans at lower interest rates and pay off their debt faster.