Effective management of loans or debts is another way of making your money work for you. So in case you have some extra cash in hand and are thinking of reducing your debt, we can help you decide which debt you should tackle first and why.

Credit card – Credit cards carry some of the highest rates of interest and every time you look to pay off a debt, consider paying any unpaid credit card dues first. Ranging anywhere between 30-46 %, credit card debts can be a huge drain financially. Many make the mistake of paying only the minimum amount due on a credit card payment, which is actually a sure-shot way of slipping into credit card debt. If you have a credit card due of about Rs. 10000 and you only pay the minimum amount every month, it will take you more than a year to pay the entire amount. The tenure will increase if you make any new purchases on the card. If you have surplus cash, credit card debt has to be the first choice of repayment.

Loans for holidays – A loan for a holiday is a Personal Loan, but we are taking it as a different category only because it is not a very good idea. Personal loans may not be bad, but taking a loan for a holiday is unwise. For example, a loan of Rs 4 lakh at an interest rate of 18% for 3 years will mean Rs. 14,461 in EMI. What is worse is that in the 3 years you will end up paying over Rs. 1.2 lakh in the form of interest. If the holiday was for a week or 10 days, this would mean you have effectively spent Rs 5.2 lakh for a vacation. If you have taken a loan for a vacation, pay it off at the earliest as it only drains you financially and does not do anything in terms of adding an asset to your name. A vacation should be earned and not financed by expensive loans. Understand your financial limitations and come up with a holiday that is within your means.

Car loans – Loans like car loans and personal loans are considered as bad loans because they do not add anything in terms of an asset. True, in a car loan the vehicle itself is an asset, but the value decreases every year and, hence, a car loan is often considered unproductive. A car loan is often larger than a personal loan and of longer tenure. For example, in a loan of Rs 7 lakh for a period of 5 years at an interest rate of 12.5 %, the EMI comes to Rs. 15,749, but the total interest outgo is about Rs. 2.45 lakh. This means your car of Rs. 7 lakh has depreciated in value to say about Rs. 2 lakh at the end of 5 year period, but you have ended up paying about Rs. 9.45 lakh in total for the car. If you have surplus cash, consider paying off the car loan and not paying interest on a depreciating asset. Although it carries a relatively lower rate of interest you should look to pay off this loan after you have tackled any existing debt in the form of credit card debt or personal loan.

Personal Loan – Personal loan is one of the most popular products in India, primarily because it can be used for a variety of reasons and is a great way to get over a temporary shortfall in cash. From weddings, to starting a business, people use personal loans for many reasons. It is convenient to get a personal loan because one does not need to offer any collaterals for such loans. However, for the same reason, personal loans have a high interest rate, second only to credit card. Hence, if you have a personal loan, try and settle that at the earliest. Banks charge anywhere between 18-26 % on such loans and can be a substantial drain on your finances. Do not use a personal loan indiscriminately and be very judicious about why you need it. When you are taking the loan, make sure it has a pre-payment facility and the associated fees and charges around it.

Housing loans – Housing loan comes last in the list primarily because the amount involved is very large and repaying it back can prove to be difficult. In any case home loans are considered good loans since it involves buying a product whose value generally increases. However, since the sum involved is very big, the tenure in most cases is considerably long. For example a home loan of Rs. 50 lakh for a period of 20 years at 10.5 % interest would mean Rs 49,919 EMI, but an outgo of about Rs 70 lakh as interest. This effectively means you have paid more in interest than the actual loan amount. Even if it's difficult to pay the entire loan amount, always look for loans that have a part payment facility. This would mean you make payments whenever you have excess cash, thereby reducing your interest burden.

Consolidating debts is a good option in order to pay off loans or debts that are high in interest and are burning a hole in your pocket. One way to do so is comparing your existing debts with new finance options like P2P Lending. Interest rates in P2P lending begin at 12%, much lower than what you may end up paying for a credit card overdraft or a personal loan from bank. Other than Debt Consolidation, these can also be considered for various purposes like expansion of existing or setting up of new business, home renovations, medical treatment and many more such urgent and unavoidable requirements. Loans on Faircent.com do not attract pre-payment charges and have no hidden cost so are easier to manage and repay. After all, every % counts!