(ANI/ATK): We may occasionally become impetuous purchasers and buy too many things or may rely on an instant personal loan to meet our immediate financial needs. Today, with easy access to credit, thanks to several instant loan apps, anybody can stretch their expenditures.
However, availing of loans is a practical solution only if you are competent enough to pay for them later on the due day. Many people take loans exceeding their credit card limits, but when it comes to repayment, they only pay a minimal amount. If you are one of them, then you must know that paying the minimum amount due on your loans and credit card bills every month helps you only in reducing your bill amount while providing you with some time to clear your liabilities. It is not a solution to not clearing your dues in time. Today, we will discuss two critical reasons why you should never pay the minimum amount on anything and how it can impact you negatively.
What is a Minimum Payment?
Before we get into our reasons, let's define a minimum payment. Your credit card or instant personal loan statement may have two figures--the total amount due and the minimum amount due. The total amount due is the sum of all your monthly expenses. A minimum payment is a payment that is less than the total amount owed. If you are unable to make full payments, you can pay a small portion of the entire outstanding sum.
The minimum sum due can also be set to a fixed amount or a percentage of the total cost, whichever is less. This may differ from bank to bank or lending institution. The best way to find out the minimum amount due on your credit card or loan is by referring to your statement, the pamphlet or link of terms and conditions that come with your card or post loan approval. As for the fees, you can find them on the lending institution's or credit card issuer's website.
Why You Should Never Just Pay the Minimum Payment on Anything
You may have found out that paying the minimum amount due works to your advantage in some cases. However, it is not a great idea always. Here are the top two reasons why you should avoid paying the minimum payment on anything.
You will have to Pay More Than You Planned For
This one is quite simple--if you have not paid your outstanding amount in the current month and have just paid the minimum balance, you are obligated to pay off the remainder of the amount next month. Because you have not paid the entire amount due, the amount remaining unpaid after the payment period is subject to interest charges.
The amount outstanding at the end of the payment date would have generally exceeded the credit card issuer's and loan's interest-free period, and so interest is levied. Now, the next time you are going to pay the amount of your credit card bill, you will need to pay the unpaid amount plus the interest levied on it.
Every month you get an interest free credit period where the bank doesn't levy any charges on you. After that, the interest will continue to accrue until the loan is completely paid off. As a result, even if you have paid the minimum amount due and avoided any late payment penalties, you will be unable to benefit from the interest-free credit period.
You Will Be Caught in the Vicious Cycle of a Debt Trap
Assume you have chosen not to use your credit card again until you have paid off your entire account in the hope that your debt would be reduced. But you're completely wrong here. Because of the lending institution's revolving credit option, your outstanding debt will climb rather than decrease.
In the event of revolving credit, you can re-pay the outstanding amount to the issuer over time by paying the monthly minimum amount necessary, which is normally approximately 5 per cent of the total amount of the bill as stipulated by your bank. There is no defined number of repayments; you can make any quantity of repayments at any moment until you have paid off your whole debt.
Nevertheless, you should be aware that interest will be charged on the unpaid sum every day until the balance is entirely settled. Until then, this remaining amount will reflect in your statement every month.
Some people manage to pay off their bills, while others rely on paying the minimum and leave the rest of the payment for the next month, accruing recurrent charges and falling into the debt trap.
Suppose you purchased something for Rs15,000 and made a minimum payment of 5 per cent, which is Rs750. Now the remaining amount is Rs14,250. Your bank will charge interest on this amount. If you again pay the minimal amount the next month, a monthly charge will be assessed on the remaining amount, resulting in a steady increase in the amount of the bill until you settle your outstanding balance.
It's all right to make the minimum payment on your loan or credit card account once in a while if you're short on cash, but making it a habit might have severe effects. We understand that instant loan apps and instant personal loans might entice you to apply for them without hesitation. However, you should also be competent enough to make timely payments on your due bills, loan interest, and EMI.