For many young earners, loans are a reality of starting in life. Education loans help you complete your degree, a vehicle loan makes commuting easier, or sometimes, a personal loan fills the gap when moving to a new city for work. Loans are not inherently bad; they can enable growth when used wisely. The challenge is ensuring they do not control your life.
1. Know Your Loan Terms Inside Out
Before signing any loan agreement, take the time to read the fine print. Understand the interest rate, repayment schedule, late payment penalties, and prepayment options. Some loans, like education loans, include a moratorium period that allows you to postpone EMIs until after you start earning. This is helpful when transitioning from studies to a job, giving you space to stabilise your finances before regular payments begin.
2. Prioritise High-Interest Debt First
Not all loans are equal. Credit card balances and personal loans often come with interest rates that are significantly higher than those for education or home loans. By clearing high-interest loans first, you reduce the total amount you pay over time. For example, paying off a ₹50,000 credit card bill quickly might save you thousands in interest compared to making only minimum payments.
3. Build a Small Emergency Fund Even While Paying EMIs
It may feel impossible to save while handling EMIs, but even a small emergency fund is essential. Without it, you may need to borrow again if an unexpected expense arises, which can increase your debt load. Start with something small, such as ₹500–₹1,000 per month, and gradually build it up to at least one month’s living expenses. This provides you with breathing space in the event of job loss or medical emergencies.
4. Avoid Lifestyle Inflation
It is tempting to celebrate your first job with weekend getaways, eating out, and shopping for the latest gadgets. While occasional treats are fine, building expensive habits too soon can trap you in a cycle of spending where debt repayment becomes increasingly complex every month. Try using a budget to keep entertainment and non-essentials within a set limit until you are more financially stable.
5. Make Prepayments When You Can
Even small prepayments make a big difference. If you receive a salary hike, a yearly bonus, or even a freelance payment, consider using a part of it to reduce your loan principal. For example, making one extra EMI payment every year can reduce the number of months or even years in your repayment schedule and save a significant amount of interest.
6. Keep Track of Your Credit Score
Your credit score is a reflection of how responsibly you handle loans and credit cards. A strong score helps you secure future loans for things like buying a house or starting a business at better interest rates. Late payments and high credit utilisation can pull your score down. Make it a habit to check your score at least once a year and review for any errors.
7. Consider Professional Advice for Complex Loans
If you are handling multiple loans or are unsure which one to pay off first, consider talking to a financial planner. Even a one-time consultation can help you build a repayment strategy that balances your EMIs, savings, and investments. This small step can save you money and give you peace of mind.
8. Real-Life Example: Balancing Education Loan and First Job
Take Rohan, a fresh graduate who landed his first job in IT. He had an education loan and considered taking a car loan immediately. Instead, he created a simple plan; paying slightly higher than his minimum EMI and building a ₹20,000 emergency fund before taking any new loans. Within three years, he cleared his education loan faster and could buy a car without feeling stressed. The takeaway? Focus on finishing one loan before adding another, and always have a safety buffer.
The Bottom Line
Loans are not something to fear; they are financial tools that can help you move forward when handled well. The key is to stay informed and disciplined: understand your loan terms, utilise options like a moratorium period when needed, prioritise high-interest debt first, and avoid overspending. These simple yet powerful habits ensure that your early earning years are about building stability rather than living paycheck to paycheck.
Start With These Actions – Right Now!
- List all your current loans and their interest rates.
- Check if any of them offer flexible repayment or prepayment options.
- Set up one automatic EMI payment to avoid late fees.
- Begin an emergency fund, even with small contributions.
- Review your credit score and plan how to improve it.
