How to reduce the burden of personal loan and credit card?

Summary

Personal Loan and Credit Card have become a part of the life of many people these days. They definitely give us immediate financial relief, but if they are not managed properly, then this facility can become a heavy burden one day. Not paying EMI on time not only increases the interest, but can also cause mental stress, drop in credit score and difficulties in taking loans in future.

In today’s article, we will learn how to reduce the burden of Personal Loan and Credit Card. The first and most important step is to check your current financial situation. It is important to know which banks you owe, how much EMI is going every month, and what your income is.

After this, it is very important to stop unnecessary expenses by making a budget. Eating out, online shopping, unnecessary subscriptions – by cutting down on all these, you can raise additional funds to pay EMI. Repaying high interest loans first and consolidating multiple loans or cards into one is also an effective way.

Introduction

In today’s time, when needs are increasing and it is becoming difficult to control expenses, personal loans and credit cards have become a part of people’s lives. On one hand, they provide us with immediate financial help, on the other hand, their misuse or not paying on time can become a headache for us. Many times, we borrow more than and the burden of these loans and credit cards starts affecting our lives. 

The pressure of EMIs, increasing interest, late fees, and impact on CIBIL score – all these things also increase mental stress. Personal Loan and Credit Card are not bad things in themselves. If they are not used properly and according to need, then they can make your financial life better. But when we borrow without planning or spend only to fulfill hobbies and desires, then they become a burden for us. Especially when the EMI amount eats up a large part of your monthly income, it becomes difficult to manage other important expenses.

In today’s article, we will know in detail how you can handle the increasing burden of Personal Loan and Credit Card wisely. We will discuss such easy and practical measures by adopting which you can gradually eliminate your debt and become financially strong. This article will not only help you get out of debt but will also give you a new thinking so that you do not get stuck in the same situation again in the future.

What is a Personal Loan?

A loan is money that a bank, financial institution, or person lends you for some time. This money has to be returned within a fixed time, along with interest. When we do not have money immediately to fulfill a need, such as buying a house, studying, buying a car, or starting a business, then we take out a loan.

There are many types of loans, like Homloansan, Personloansoan, Educatloans Loans, Vehicle loans, etc. But keep in mind – a loan is a responsibility. It is very important to repay it on time; otherwise, your CIBIL Score, i.e., credit history, may be spoiled in the future.

Simply put, the loan is a way through which you can get the money you need today, but it has to be returned in the form of installments in the future.

What is a Credit Card?

A credit card is a plastic or metal card that a bank or financial institution gives to its customers. With its help, you can buy any goods or services without paying money immediately. In simple words, it is a kind of “card to spend on credit”.

When you purchase with a credit card, the bank makes the payment for you at that time, and later, you pay that amount back to the bank. The bank gives you a limit, which is called a credit limit. You can spend within this limit. Every month, when you get a bill, Hatch tells you how much you spent and how much is left to pay.

If you pay the entire bill on time, then you do not need any interest. But if you do not pay the entire bill or pay only the minimum amount due, then the bank starts charging interest on the remaining amount.

What will happen if the EMI of a Personal Loan and Credit Card is not paid?

Let us understand in simple language what can happen if you do not pay the EMI of the Loan.

1. Late payment charge and interest

If you have not paid the EMI on the due date, the bank can charge you a late payment charge. Also, the bank starts charging a high rate of interest on the outstanding EMI, which can usually go up to 36% per annum. This makes your EMI even more expensive.

2. Impact on CIBIL score

Your CIBIL score is very important for your financial future. If you do not pay EMI or pay late repeatedly, it gets recorded in your credit report, and your score may fall. This may make it difficult to get a loan or a new Loan in the future.

3. The outstanding keeps increasing

If you do not pay EMI, your outstanding balance keeps increasing because interest keeps getting added to it every month. The longer you do not pay, the bigger amount you will have to pay.

4. Recovery calls and notices

If you do not pay EMI for several months, then you start getting repeated calls, messages, or emails from the bank. After this, the bank can also send you a legal notice. In some cases, the bank can also send recovery agents to you.

5. Legal action can be taken

If your amount has become very high and you have not paid for a long time, then the bank can also take legal action against you. This can also affect your image and mental state.

How can to reduce the burden of Personal Loan and Credit Card?

In today’s era, when the needs of life are increasing day by day, options like personal loan and credit card have become a means of providing immediate relief. But if they are not used wisely, then this facility can become a cause of trouble. The shortage of EMI, increasing interest on credit card, late fees and fear of default – all these together create mental and financial stress. In such a situation, it becomes important that we manage them wisely and reduce their burden.

Check your existing liabilities

First of all, it is important to know from which banks or NBFCs you have taken a personal loan and how many credit cards you have. Note down the EMI, interest rate, payment date, and remaining amount of each loan in a list. This will give you a correct idea of ​​your entire debt.

Make a budget and cut down on unnecessary expenses

Make a list of your monthly expenses – like rent, ration, bills, children’s fees, etc. Then e e where you can reduce your expenses. Things like eating out, online shopping, and subscriptions often spoil your budget. Control them and invest that money in EMI or card payment.

Pay off the high-interest loan first (Debt Avalanche Method)

If you have taken many loans, then first start paying off the loan or credit card on which the highest interest is being charged. This will reduce the interest amount in the long run, and you will feel relieved quickly.

Don’t make the mistake of minimum payment

Credit card companies often provide the facility of paying only the “Minimum Due Amount”, but this does not pay off your entire bill d the interest keeps increasing. Try to pay the entire bill every month.

Reduce EMI by combining loans (Debt Consolidation)

If you have multiple loans or cards, then look at the option of paying off all the smaller loans by taking a personal loan. This will result in a single EMI, and the interest can also be reduced.

Increase EMI tenure (Loan Restructuring)

If the burden of EMI seems too much, then contact your bank and try to increase the EMI tenure. This reduces the EMI per month, although the total interest may increase.

Create additional sources of income

You can start a freelance work, part-time job, or small business so that your income increases and you can repay the loan quickly.

Use the facility of Auto Debit

Often, late fees and penalties are charged due to non-payment of EMI or Credit Card on time. To avoid this, activate the Auto Debit facility so that the payment is made on time.

Take advantage of Balance transfers

Many banks provide the facility of credit card balance transfer in which you get a lower interest rate. Using this, you can transfer your old expensive card bill to a cheaper option.

Avoid mental stress and seek advice

The burden of debt can cause mental stress. Instead of panicking, seek advice from a financial advisor and make a strategy. If needed, seek credit counseling as well.

What is a Loan Settlement?

Loan Settlement is a process in which you negotiate with your creditor to forgive a part of the outstanding amount on your Loan by making a lump sum payment. It is an agreement that you make with your card issuer as a last resort when you see that your Loan debt is increasing.

This can happen due to many reasons, ranging from unnecessary spending to careless spending habits. When your debt increases, the interest on it also increases, which can make it difficult for you to repay the outstanding amount. If you do not see any way out of this, then you can recommend a Loan Settlement.

What are the reasons for doing a Loan Settlement?

Below are some common reasons:

• If a person loses his job, stops a source of income, or suffers huge losses in business, then it may be difficult to repay the loan on time.

• There may be a shortage of money to repay the loan if the expenses suddenly increase due to a major illness or medical emergency.

• Many times, a person has the burden of more than one loan, which becomes difficult to repay on time.

• There may be problems in repaying the loan due to any natural disaster, accident, or any major crisis in the family.

• If the interest rate of the loan is very high and there is a problem in repaying the installment, then a Loan Settlement is resorted to.

• Many times, a person is not able to manage his expenses and income properly after taking a loan, which causes problems in repaying.

What documents are required to do a Loan Settlement?

Let us know what documents are required for Loan Settlement:

1. ID Proof

• Aadhar Card
• PAN Card
• Passport
• Driving License
• Voter ID

2. Address Proof

• Aadhar Card (if it has the correct address)
• Electricity or Water Bill
• Copy of Bank Passbook or Bank Statement
• Rent Agreement (if you live on rent)

3. Income Proof (if required)

• Salary Slip (if you are employed)
• Bank Statement (last 6 months)
• Copy of Income Tax Return (ITR)
• Business Documents (if you are a businessman)

4. Loan Statement

You will have to provide the Loan statement to give the correct information about your outstanding balance. The bank can also generate this statement itself, but sometimes they ask you for a copy of it.

5. Settlement Request Letter

If you are approaching the bank for settlement on your own, you will have to give a written Settlement Request Letter in which you can explain:

• Why do you want a settlement?
• What is your financial situation?
• How much can you pay as a one-time payment?

6. Settlement Offer Letter given by the bank

When the bank agrees to the settlement, they give you a Settlement Offer Letter. Read it carefully and confirm the amount and terms mentioned in it.

What to do before doing a Loan Settlement?

Below are some steps that should be followed before a Loan Settlement:

• First of all, check your income, expenses, and all other debts properly. Know how much you can repay.

• Before a Loan Settlement, share your problem with the bank or lender. 

• Sometimes, they can offer you a better solution, such as reducing the EMI or increasing the loan term.

• Contact a financial advisor or expert. They can help you make the right decision and explain how a Loan Settlement will affect your credit score.

• If you decide to do a Loan Settlement, read the terms and conditions given by the bank carefully. Make sure that you are not being charged any hidden fees.

• Doing a Loan Settlement can reduce your credit score. This can make it difficult to get a loan in the future. Make a decision keeping this in mind.

• Loan Settlement should be the last option. Before that, consider other options like refinancing, reducing EMIs, or asking family and friends for help.

How to apply for Loan Settlement?

If you are unable to pay your Loan dues and are troubled by heavy interest rates, a Loan Settlement can be a possible solution. Under this process, the bank or Loan company can waive off part of your total outstanding amount and give you the option to make a lump sum payment (One-time Settlement). However, this can affect your CIBIL score, so adopt it only as a last option.

Step-by-step process to apply for Loan Settlement

• First of all, decide that you are not in a position to pay the entire Loan dues.

• Check your income and expenses and decide how much you can pay at the most.

• Talk to the customer care of your bank or Loan company and tell them about your current financial situation.

• Ask for a settlement offer from the bank and start the conversation.

• The bank will propose a settlement amount, which will be lower than your outstanding amount.

• If you don’t accept this amount, negotiate with the bank and attempt to lower the amount based on your capacity to pay.

• After the bank and you reach an agreement on a specific amount, ensure that you receive a written settlement letter.

• It should explicitly state the settlement terms, payment dates, and other conditions.

• After completing the settlement, pay the amount in full within the given time.

• Get a No Due Certificate (NOC) or Final Settlement Letter from the bank after the payment.

• After the settlement, make sure the bank updates the “Settled” status in your CIBIL report.

• This can affect your credit score, so inculcate good financial management habits to improve it in the future.

What is the impact on the CIBIL score after a Loan Settlement?

A settlement can hurt your credit score. The impact can be seen in the following ways:

• After the settlement process, your credit report records that you have “settled” your debt. This entry remains in your credit history for 7 years and can be viewed negatively by lenders or other creditors, which can affect your chances of getting a loan in the future.

• Since a settlement means that you have not repaid the entire debt, when you try to get a new loan in the future, banks may reject your application or offer you loans at higher interest rates by looking at your credit score and report.

• After settlement, if you have a Loan or other credit line, your credit limit may be reduced as creditors think you may be a high-risk customer.

• If your credit score drops, it may be difficult for you to get a loan, Loan, or any other type of credit facility. This can also affect your financial stability, especially if you face a financial emergency in the future.

• When you settle with your bank, you are not paying off the entire debt, but a certain amount that is less than the principal amount. This is viewed negatively by the credit bureaus, as it shows that you have been unable to repay your debt. As a result, your credit score may drop.

What are the advantages (Pros) of doing a Loan Settlement?

Let us know what the benefits of doing a Loan Settlement are:

• If your Loan dues have become very high, and you are unable to repay them, then a settlement can give you great relief.

• When you do not pay your Loan continuously, the bank can send a legal notice to you and can also send a recovery agent.

• The interest on Loans is very high, which can be up to 30-45% per annum. If you are not paying on time, the interest and late payment fees keep increasing continuously.

• While settlement will bring down your CIBIL score, provided you exercise financial responsibility after settlement and settle your other loans and bills punctually, you will improve your score over time.

• In a Loan Settlement, you pay a specific sum at one time, which settles your debt entirely. It may be helpful to the persons who desire to come out of debt by increasing a little money at a time.

• Mental tension grows through rising debt and bank calls. On settlement, you are free from this concern, and you may concentrate on better financial status again.

What are the disadvantages (Cons) of doing a Loan Settlement?

Let us know in detail what the disadvantages of doing a Loan Settlement are.

• The biggest disadvantage of a Loan Settlement is that it spoils your CIBIL score. When you settle with the bank and pay a lesser amount instead of paying the entire dues, the bank reports it in “Settled” status. This status can remain in your credit report for up to 7 years, which may make it difficult to get a loan or a new Loan in the future.

• If you have done a Loan Settlement once, banks and other financial institutions may consider you a “high-risk customer”. This may cause problems in getting a home loan, personal loan, or business loan, or the bank may give you a loan at a higher interest rate.

• In some cases, when you go to take a loan from another bank in the future, the bank may ask you to repay the entire previous settlement amount after looking at your credit history. That is, if you had settled by paying Rs 50,000 on an outstanding amount of Rs 1 lakh, then the new bank can demand the remaining Rs 50,000 from you.

• If you have settled a Loan with a bank, then the same bank can refuse to issue you a Loan again in the future.

• Doing a Loan Settlement can spoil your relationship with the bank. The bank sees it as if you have not fulfilled your financial responsibilities completely, due to which you may face problems in banking services in the future.

Conclusion

Personal loans and credit cards have become very common in today’s time. Most people are using them for some reason or the other – whether it is an essential expense, medical emergency, children’s education, home renovation, or the desire to fulfill a dream. Everything seems easy in the beginning because banks and companies give you money immediately. But the real challenge begins when it becomes difficult to pay the monthly EMI and credit card bill.

Gradually this loan sits like a Personal Loan and Credit Card burden on us. A large part of the monthly salary is spent in paying EMI and interest. Other essential expenses are not met and mental stress starts increasing. Sometimes the situation becomes so bad that people default – that is, they miss paying EMI or bill. This spoils the CIBIL score and it also becomes difficult to get a new loan in the future.

But there is no need to panic at all. There is a solution to every problem. If you take steps thoughtfully and do a little planning, then the burden of personal loan and credit card can be gradually reduced. For this, the most important thing is to understand your situation honestly and control your expenses.

Frequently Asked Questions (FAQ’s)