5 smart ways to save money through a personal loan

When used wisely, a personal loan can be more than just a means of borrowing. It can be a strategic tool to safeguard and grow your finances. The most important factor in such cases is nothing but proper planning and long-term thinking. Aspiring borrowers should sit down with a sheet of paper and a pen and write down the top reasons why they are going for a particular loan.

This can help individuals make well-thought-out calls. Here are five simple yet practical ways borrowers in the country can save money through a personal loan.

1. Plan and consolidate high-interest debts

• If you are servicing various credit cards, overdrafts, or multiple short-term personal loans with steep interest rates, then replacing these with a single personal loan at a lower rate can significantly reduce interest outgo and also aid in proper personal finance planning.
• You can also benefit immensely from one monthly EMI instead of juggling several, which simplifies repayment and helps you avoid missing due dates and facing penalties.
• This process of simplifying and combining several loans and credit card bills together is known as debt consolidation. It helps in keeping borrowers emotionally sound and stress-free.

2. Choose a shorter tenure and compare carefully

• When the total loan tenure is reduced, it means a higher EMI. Still, lower total interest payments. Whereas the longer the tenure, the more interest is accumulated and paid to the lender.
• You should carefully compare interest rates, processing fees, prepayment penalties, and other hidden charges across lending institutions to select the most cost-efficient option.
• If in doubt, reach out to a certified financial advisor and discuss your financial limitations, long-term targets, and make an informed decision.

3. Borrow only what you truly need

• Use a personal loan for urgent or essential purposes, such as medical bills, education, or home repair, rather than for discretionary or leisurely spending, which can lead to debt stress.
• Maintain an emergency fund. A fund that can hold for 3-6 months of expenses for you and your family. So you are not forced to rely on loans for everyday expenses.

4. Pre-pay, part-pay, or refinance when possible

• Making lump-sum or partial payments reduces the principal, which in turn lowers the interest burden. Check whether your lending institution allows prepayment with minimal charges.
• If your present loan has a high rate, consider a balance transfer to a lower-rate lender; this can yield substantial savings.
• Proper planning for the clearing of pending debt as early as possible is critical and can go a long way in keeping your finances in order.

5. Automate repayment and maintain a good credit profile

• Your repayment history is a crucial factor. That is why you should never miss out on it. If possible, set up auto debit for EMIs to ensure that you avoid late payments, extra interest, and other associated financial complications that can damage your credit score.
• A high credit score, preferably a score of over 750, will enable you to negotiate better terms, lock in lower interest rates, and secure easier repayment terms when taking out or refinancing personal loans.

Try to treat a personal loan as a financial tool and use it wisely. You should only go ahead with any particular loan after understanding the complications and challenges a loan can bring. All personal loans come with risks such as: possibility of debt build-ups, interest charges, processing fees, hidden charges, etc.

That is why, only once you are clear of these issues, you should go ahead with a personal loan. Try to use this loan for debt consolidation, bringing down interest rates, and for meeting essential expenses. Don’t use these funds for meeting leisurely or lavish expenses.

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