Effective steps to repay your personal loan

At 29, I make ₹59,000 a month. What steps should I take to pay off my two personal loans, which come out to be ₹3.6 lakh?

—Name withheld on request

Personal and credit card loans are the worst financial mistakes that one can undertake, especially if the loan is used for buying depreciating assets or on discerning expenses like holidays and/or luxury goods.

At the age of 29, it is imperative that you ensure that your monthly income leads to some financial savings that help in liquidity management and avoid paying hefty interest expenses.

As a thumb rule, we recommend at least 20% savings in financial instruments and not more than 50% of equated monthly instalments (EMIs).

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At an income of ₹59,000 and a personal loan of ₹3.6 lakh, my suggestions would be as follows:

1) I would strongly recommend that you start setting aside at least ₹4,000 a month, and if possible more, for repaying the personal loan.

2) If you have any large non-equity investments like bonds or fixed deposits, it is wise to immediately sell those and pay off the loan as the returns from non-equity investments would surely be much lower.

3) Additional inflows and bonuses should go towards paying off the loan as most investment investments like equities generate volatile returns and pre-tax, while this is a certain and a post-tax outflow. Please do remove any short-term goals from this while you repay this, especially any goal over the next 12-24 months.

4) Please reduce your systematic investment plan (SIP) investments if needed to some extent, and with the savings on interest, the amount can be invested into SIPs.

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5) Please try and cut down on discerning expenses until the loan is largely cleared as practically every day the loan burdens your expenses and effectively you are borrowing money for spending, which is a terrible financial blunder.

6) Ensure you list down all your financial goals over the next three years and set aside money for them, especially the ones that are non-negotiable, and try and ensure further loans are not needed for these goals.

7) In case you have dependents or are planning for the immediate future, ensure you are fairly covered by your insurance plans (both term and health insurance). Do not rely on your corporate health insurance as when you leave your job, there could be difficulty in getting a new one, plus the cover premia might be expensive as well.

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A healthy financial plan needs to have reasonable liquidity as sudden expenses can lead to disastrous long-term consequences. Lastly, it would be wise to consult a professional and Securities and Exchange Board of India-registered financial planner who can draw up your financial position along with cash flow predictions to ensure you don’t head into a debt or liquidity trap.

Vivek Banka is a co-founder of GoalTeller.