Have multiple loans? Here’s how you should prioritise the order of repayment

In today's market, where multiple lenders or new age fintech startups are ready to offer personal loans, and credit cards one can easily be lured to take debt when they may not actually need it.  While taking a loan has become easier than ever, its repayment continues to be a complex process. It is important for an earning individual to follow a systematic plan to pay off loans. People lack adequate financial literacy to effectively handle their finances, and if those challenges are not addressed on time, it can cause major financial instability. Effective money management skills and sufficient knowledge on the matter can easily help you prevent debt from getting out of control.

Let us take a look at some of the best and most proven techniques to manage multiple loans and learn how to prioritise the order of repayment.

Know your budget

Having a clear idea of your budget will provide a better understanding of your financial situation. An understanding of one's own budget can help in planning the allocation of funds towards debt repayment.

How to create a budget?

One can create a budget by evaluating income, expenses, and total debts. You needs to figure out where the biggest chunk of your income is being spent and whether you could make any progress in cutting down on the extra expenses.

Avoid debt trap

Loans with high interest can quickly accumulate to become a larger sum that can create a burden. Debt that has a higher interest rate can cost more in the long run, so considering paying it off first can actually help in getting rid of bigger tension. Repayment of loans should be prioritised on the basis of cost; the most expensive loan should be cleared off first and this is called a debt avalanche. After paying off the biggest debt, move on to the next one.

Renegotiate the terms

In a situation where you feel that repaying a high-cost loan is becoming difficult, you may approach the lender to renegotiate the terms. Interest rates are the lowest when the term of the loan is long. This way, you can benefit from switching to a lower interest rate.

Tax benefits

Some loans may seem costly, but the tax benefits associated with them can lower the cost for the lender. Multiple tax benefits can bring down the actual cost of a home loan by sharply reducing tax liability. Having a home loan may yield long-term benefits.

Using surplus to clear loan

You should also consider liquidating surplus assets or any low-yield investments to clear their outstanding. You may consider taking out profits from equity mutual funds or gold investments (if any) to repay the long outstanding dues.