Came across this article on dna....good one
Restructure your loans to earn financial freedom
Ravi and Kavitha wanted to start a small business. Both had well-paying corporate jobs, but business was what they wanted to do. They had a sound business plan ready and had even spoken to a few people, who were willing to fund the project. But they could not get around to quitting their jobs, as they had some loan to pay off. This was depressing them.
They were willing to make a few lifestyle changes, but they were not sure if the business would earn enough to pay the loan EMIs.
The fear of defaulting on their loans and struggling to make ends meet deterred them from pursuing their dream.
So they decided to meet a financial planner friend for help to get out of loans.
Based on his advice, they set a Rs5 years - zero loans� target. They also decided not to take any more loans.
This is how they went about it. They listed down all their loans - five in all.
1. Home loan � Rs20 lakh. Current outstanding: Rs15.5 lakh. EMI: Rs18,500. Interest rate: 9.5%. Tenure pending: 11 years
2. Credit card (Ravi) � Rs75,000. Paying minimum balance every month.
3. Car loan (Ravi) � Rs2.5 lakh. Current outstanding: Rs1.5 lakh. EMI: Rs6,500. Tenure pending: 2 years
4. Credit card (Kavitha) � Rs35,000. Paying minimum balance every month.
5. Personal loan (Kavitha) � Rs1,00,000. Current outstanding: Rs65,000. EMI: Rs2,750. Tenure pending: 23 months.
They had Rs18.75 lakh as liabilities. They were paying Rs32,500 monthly towards loan repayment. As per this, they would be out of loans in 11 years.
5 years - zero loans
Both had got an annual bonus of Rs25,000 each and were considering whether to use it towards loan repayment or invest it.
They had a contingency fund of Rs10,000 monthly for long-term needs. This year, after getting their increments, they were willing to commit another Rs5,000 towards repaying their loans.
The contingency fund cannot be utilised for any other purpose. With a total of Rs37,500 available for repaying loans, and a lump sum of Rs50,000 at hand, what is the best way to get out of loans as soon as possible?
The steps
1. They will have to target the most expensive loans first. Two credit card loans of Rs1,10,000 will take another five years on minimum balance payment. The interest rates charged could be as high as 2.99% per month (36% per annum). Hence, use the Rs50,000 bonus to repay one credit card to begin with.
2. Credit card outstanding is now Rs25,000 on Ravi�s card and Rs35,000 on Kavitha�s card. Ravi was paying Rs3,500 on his card till the previous month. Now he will have to increase repayment on card by Rs5,000 (committed amount). Repay Rs8,500 on the card. In three months, Ravi�s card will be paid off in full.
3. Next target is Kavitha�s card. She has been paying Rs1,500 towards that credit card. The amount of Rs8, 500, which was earlier used by Ravi to pay for his card, can be added to this Rs1,500 and totally Rs10,000 can be used to pay off Kavitha�s card. That will be done in 4 months.
Now, with two loans done and Rs10,000 additional cash flow after seven months of the start of project �debt-free�, they now target the next most expensive loan � the personal loan. Now, the loan outstanding would be Rs47,000.
4. The additional Rs10,000 can be saved in the bank for four months and the personal loan can be settled in 4 months.
After this, the amount available to repay loans would be Rs10,000 + Rs2,750 = Rs12,750. The time elapsed since start of project: 11 months.
5. Next target is car loan. Current outstanding 11 months after start of project is Rs1 lakh. Already repaying towards this loan: Rs6,500 per month. Start a six month recurring deposit of Rs12,500 with the bank. At the end of six months, the maturity amount of Rs75,000 can be used to settle the car loan in full.
Now, amount available to repay loans would be Rs12,500 + Rs6,500 = Rs19,000. Time elapsed since start of project: 1 year and 5 months.
6. Final target is home loan. It has been 10 years since they took this home loan. Current outstanding: Rs14.7 lakh. Ravi and Kavitha should make a visit to the home loan company/bank and inform their willingness to increase the EMI on their loan by Rs19,000 from Rs18,500 to Rs37,500. Most banks will be willing to reschedule the loan as long as they are convinced about the repaying capacity of the borrowers. With the new EMI, the home loan will be over in another 37 months (3 years and 1 month).
Bingo! All loans would be over in 4 years and 6 months. Huge amounts saved on interest.Like the famous saying goes, �Freedom is not granted, but rather earned�, Ravi and Kavitha spent half an hour on planning and followed through with the plan diligently to earn their freedom from debt!
Restructure your loans to earn financial freedom
Ravi and Kavitha wanted to start a small business. Both had well-paying corporate jobs, but business was what they wanted to do. They had a sound business plan ready and had even spoken to a few people, who were willing to fund the project. But they could not get around to quitting their jobs, as they had some loan to pay off. This was depressing them.
They were willing to make a few lifestyle changes, but they were not sure if the business would earn enough to pay the loan EMIs.
The fear of defaulting on their loans and struggling to make ends meet deterred them from pursuing their dream.
So they decided to meet a financial planner friend for help to get out of loans.
Based on his advice, they set a Rs5 years - zero loans� target. They also decided not to take any more loans.
This is how they went about it. They listed down all their loans - five in all.
1. Home loan � Rs20 lakh. Current outstanding: Rs15.5 lakh. EMI: Rs18,500. Interest rate: 9.5%. Tenure pending: 11 years
2. Credit card (Ravi) � Rs75,000. Paying minimum balance every month.
3. Car loan (Ravi) � Rs2.5 lakh. Current outstanding: Rs1.5 lakh. EMI: Rs6,500. Tenure pending: 2 years
4. Credit card (Kavitha) � Rs35,000. Paying minimum balance every month.
5. Personal loan (Kavitha) � Rs1,00,000. Current outstanding: Rs65,000. EMI: Rs2,750. Tenure pending: 23 months.
They had Rs18.75 lakh as liabilities. They were paying Rs32,500 monthly towards loan repayment. As per this, they would be out of loans in 11 years.
5 years - zero loans
Both had got an annual bonus of Rs25,000 each and were considering whether to use it towards loan repayment or invest it.
They had a contingency fund of Rs10,000 monthly for long-term needs. This year, after getting their increments, they were willing to commit another Rs5,000 towards repaying their loans.
The contingency fund cannot be utilised for any other purpose. With a total of Rs37,500 available for repaying loans, and a lump sum of Rs50,000 at hand, what is the best way to get out of loans as soon as possible?
The steps
1. They will have to target the most expensive loans first. Two credit card loans of Rs1,10,000 will take another five years on minimum balance payment. The interest rates charged could be as high as 2.99% per month (36% per annum). Hence, use the Rs50,000 bonus to repay one credit card to begin with.
2. Credit card outstanding is now Rs25,000 on Ravi�s card and Rs35,000 on Kavitha�s card. Ravi was paying Rs3,500 on his card till the previous month. Now he will have to increase repayment on card by Rs5,000 (committed amount). Repay Rs8,500 on the card. In three months, Ravi�s card will be paid off in full.
3. Next target is Kavitha�s card. She has been paying Rs1,500 towards that credit card. The amount of Rs8, 500, which was earlier used by Ravi to pay for his card, can be added to this Rs1,500 and totally Rs10,000 can be used to pay off Kavitha�s card. That will be done in 4 months.
Now, with two loans done and Rs10,000 additional cash flow after seven months of the start of project �debt-free�, they now target the next most expensive loan � the personal loan. Now, the loan outstanding would be Rs47,000.
4. The additional Rs10,000 can be saved in the bank for four months and the personal loan can be settled in 4 months.
After this, the amount available to repay loans would be Rs10,000 + Rs2,750 = Rs12,750. The time elapsed since start of project: 11 months.
5. Next target is car loan. Current outstanding 11 months after start of project is Rs1 lakh. Already repaying towards this loan: Rs6,500 per month. Start a six month recurring deposit of Rs12,500 with the bank. At the end of six months, the maturity amount of Rs75,000 can be used to settle the car loan in full.
Now, amount available to repay loans would be Rs12,500 + Rs6,500 = Rs19,000. Time elapsed since start of project: 1 year and 5 months.
6. Final target is home loan. It has been 10 years since they took this home loan. Current outstanding: Rs14.7 lakh. Ravi and Kavitha should make a visit to the home loan company/bank and inform their willingness to increase the EMI on their loan by Rs19,000 from Rs18,500 to Rs37,500. Most banks will be willing to reschedule the loan as long as they are convinced about the repaying capacity of the borrowers. With the new EMI, the home loan will be over in another 37 months (3 years and 1 month).
Bingo! All loans would be over in 4 years and 6 months. Huge amounts saved on interest.Like the famous saying goes, �Freedom is not granted, but rather earned�, Ravi and Kavitha spent half an hour on planning and followed through with the plan diligently to earn their freedom from debt!
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