The Double-Edged Sword of Debt

Loans are a powerful tool that can help us achieve major life goals, like buying a home or getting a good education. However, if not managed wisely, they can quickly turn into a significant financial burden. Here are the top five mistakes people make in loan repayment and how to avoid them.

Common Loan Repayment Mistakes

1. Paying Only the Minimum Due on Credit Cards: Credit card companies often require you to pay only 5% of your outstanding balance. This might seem convenient, but it's a dangerous trap. The remaining balance accrues interest at an exorbitant rate (often 36-48% per year), and it can take decades to clear the debt if you only pay the minimum.

   • The Fix: Always try to pay your credit card bill in full. If you can't, pay as much as you possibly can to reduce the principal quickly.

2. Missing EMI Deadlines: Missing an EMI payment has a triple negative effect: you are charged a late payment fee, your credit score takes a significant hit, and it can affect your relationship with the lender.

   • The Fix: Set up an auto-debit (ECS mandate) for all your EMIs to ensure the payment is never missed.

3. Taking on Too Many Loans Simultaneously: Juggling multiple EMIs (e.g., for a car, a personal loan, and consumer durables) can strain your monthly budget and increase the risk of default. A general rule is that your total EMIs should not exceed 40-50% of your take-home salary.

   • The Fix: Prioritize your needs and avoid taking on new debt until you've cleared existing loans. Consolidate high-interest loans if possible.

4. Not Pre-Paying When You Have Surplus Funds: Many people continue to pay their EMIs for the full tenure, even when they receive a bonus, inheritance, or other windfall. Not using this extra cash to pre-pay your loan is a missed opportunity to save a huge amount of interest.

   • The Fix: Whenever you have surplus funds, use them to make a partial pre-payment on your loan. This can either reduce your EMI or, more effectively, reduce your loan tenure.

5. Ignoring the Total Cost of Borrowing: People often focus only on the monthly EMI amount and ignore the total interest they will pay over the life of the loan. As our Loan EMI Calculator shows, it's common to pay more in interest than the principal itself for long-tenure loans.

   • The Fix: Before signing the loan agreement, always calculate the total interest payable. Sometimes, stretching your budget a little for a higher EMI and shorter tenure can save you lakhs in the long run.

By avoiding these common mistakes, you can use loans as a stepping stone to your goals, not a stumbling block to your financial well-being.