For most students, education loans are the only way to finance their education. But when the repayment phase starts, it becomes difficult to manage the EMI with other expenses. Repaying your loan earlier not only diminishes financial burden but also saves interest outflow. Here are five clever ways to repay your education loan relatively faster.
1. Begin Repayment While in College
A moratorium period usually accompanies most education loans, and that implies that you won't have to make repayments after completing your education. Making payments as small as the interest amount even while studying will serve to curtail your repayment burden greatly. Financial institutions and certain banks actually reward borrowers or offer reduced rates if you make advance partial payments. Even a small monthly installment can lower the total outstanding balance and decrease your loan period.
2. Pay Bonuses and Windfalls Towards Your Loan
Whenever you get surprise funds like bonuses, tax refunds, gifts, or incentives, think of applying a part of it towards prepaying your education loan. In contrast to EMIs, which pay mostly interest in the initial years, lump sum payments go towards the principal amount directly, lessening the interest burden. If there is no prepayment penalty from your lender, this can be a great way to settle the loan sooner.
3. Opt for Bi-Weekly Payments Instead of Monthly EMIs
Instead of paying your EMI in a month, make half-payments every fortnight. This equates to 26 half-payments in a year, equivalent to making 13 full payments rather than 12. This little trick will enable you to pay off the outstanding principal earlier and, eventually, shave months or even a year off your loan term depending on the amount and interest rate of the loan.
4. Boost Your EMI Annually
If your salary goes up with a hike or a change in job, try to hike your EMI too. A 5 to 10 per cent hike in your monthly EMI can go a long way. The higher your EMI, the more principal you pay back every month and the lower your interest liability over the years. Most financial institutions permit the revision of EMI without penalty, so you can keep on boosting your payment as your economic position improves.
5. Refinance or Transfer Your Loan for Improved Terms
If you find that your existing interest rate is higher than the current market rate, consider refinancing or transferring your education loan to another bank or financial institution with improved terms. Some institutions offer lower interest rates to individuals with a good credit score or a stable income. Even a 1 to 2 per cent cut in the interest rate can lead to significant savings and bring forward the loan closure date. But look out for balance transfer fees and other charges before making the change.
Repaying an education loan early needs careful planning and financial discipline. By paying small amounts while in college, putting extra money aside, following intelligent payment strategies, gradually raising your EMI, and opting for refinancing, you can lower your debt load earlier. Becoming debt-free early helps you concentrate on growing wealth and gaining financial security sooner.
