Many don’t realize they are in a debt trap unless the EMI payments become huge enough to mess up their finances. People usually take another loan before the first one is repaid in full. Such multiple financing usually includes education loans, home loans, vehicle loans, credit card loans, etc. Paying EMI for two to three loans puts a heavy burden on the finances, which eventually leads to skipping of EMIs. Ultimately, it affects the credit scores adversely. So, what’s the solution?
The solution lies in personal loans. Let’s see how.
What are personal loans?
Personal loans are a lending arrangement between the banks and borrowers, whereby the banks lend a certain amount of money to the borrowers against consideration in the form of interest. It can be taken for any purpose like purchasing a home, business, paying medical bills, etc.
Benefits of personal loan
Personal loans come with various benefits that include:
- Unsecured arrangement: Personal loans are unsecured. Therefore, the borrower is not required to furnish any security to secure a personal loan. This increases its reach to a wide variety of people. Being unsecured, the individual loan interest rates are usually higher than those of secured loans. But still, they are affordable against other unsecured lending arrangements like credit card debts.
- Any purpose usage: Personal loans can be used for any purpose. In most cases, personal loans are available on a ‘no reason asked’ basis.
- Debt consolidation: Personal loans can be used to consolidate your multiple debts into a single personal loan by prepaying the existing obligations. So, what’s stopping you from using it for your past debt repayments?
To calculate the amount of EMI required to pay for your loan, you can use a personal loan EMI calculator. You will need to enter the loan amount, the personal loan interest rate applicable, and the tenure of the loan. The personal loan EMI calculator will also bifurcate the total amount of interest you will pay over the loan term.
How to use personal loans to repay your past debt obligations?
If you are in a debt trap, follow the following steps to avoid it.
- Prioritize your debts: Start with making a list of your past debts, with high-interest debts on the top. This will get you a clear idea of what loans are putting a burden on your finances.
- Take a personal loan: The sanction of a personal loan will depend upon your eligibility. Once you are eligible, apply for the loan. The loan amount will depend upon your profile and the debt list that you made.
- Start prepaying high-interest debts: High-interest debts burn a hole into your pocket till it gets empty. Repay them on priority. This can include credit card outstanding bills and other unsecured borrowing arrangements. It will reduce your EMI burden. It’s far better to pay 15% interest on personal loans than to pay 30% interest on credit card loans. If you are paying 2-3 EMIs, then most probably, it will reduce to only your personal loan EMI. This will also save your credit score from deteriorating, as every EMI skipped leads to a further reduced credit score.
Personal loans can act as a great tool to help you get rid of your past debt obligations. Carrying the burden of multiple EMIs when you can consolidate them into a single EMI is of no use.