Loan Tips: Is the burden of many loans on your head? Loan Consolidation will be your 'Sanjeevani'...

In today's life, our needs have increased so much that taking a loan has become a common thing. Consumer loan for buying a phone, personal loan for sudden expenses, and credit card EMI for shopping. The result is that at the end of the month, we have to pay 4-5 different EMIs, which have different due dates and interest rates.

If even a single EMI is missed in this rush, there is a fear of late fees and a bad CIBIL score. If you, too, are troubled by this 'khichdi' of many loans, then there is a very useful solution for you - Loan Consolidation.

After all, what is this loan consolidation?

'Consolidation' simply means 'to join together'. Loan consolidation is a process in which you take a single big loan to repay all your small loans.

Understand this with a simple example-

Suppose you have 3 debts:

Credit card dues: ₹1 lakh (interest rate 24% per annum)

Personal loan: ₹2 lakh (interest rate 14% per annum)

Consumer durable loan: ₹50,000 (interest rate 16% per annum)

Now to repay these three, you take a new personal loan of ₹3.50 lakh from the bank, whose interest rate is only 12% per annum. With the money from this new loan, you will repay all three old debts immediately. The advantage of this is that now, instead of 3 separate EMIs, you have to pay only one EMI, that too at a lower interest rate. This process is called loan consolidation.

When do you need loan consolidation?

You should think about this option if:

You have more than one unsecured loan (such as a personal loan or credit card debt) running on you.
You are finding it difficult to keep track of multiple EMIs and their different due dates every month.

Some of your loans, especially credit card dues, have very high interest rates.

You want to reduce your total monthly EMI burden (though this may require you to extend the loan tenure).

Loan Consolidation: Before and After

Parameters Before Consolidation After Consolidation
Number of Loans 3 (Credit Card, Personal, Consumer) 1 (New Personal Loan)
Total Outstanding ₹3.50 lakh ₹3.50 lakh

Average Interest Rate 18% 12%
Monthly EMI 3 different EMIs Just 1 EMI
Management Difficulty Very Easy

What are the loan consolidation options in India?

Personal Loan

This is the most common and easiest method. You can repay all your old debts by taking a new personal loan.

Loan Against Property
If you have a property (house or land), you can take a big loan by mortgaging it. Its interest rate is also lower than that of a personal loan.

Top-up Home Loan
If you already have a home loan, you can take a 'top-up' loan on the same. Its interest rate is also usually quite low.

Advantages and disadvantages of loan consolidation
Advantages

One EMI, one due date: Your life becomes much easier.

Low interest rate: If you choose the right option, your average interest rate can be reduced, which saves money.

Better credit score: When you repay all your old loans with one loan, it has a good effect on your credit score. Having one EMI also reduces the risk of default.

Disadvantages
Long tenure, high total interest: Many times, people take a loan of very long tenure in order to reduce their monthly EMI. The EMI reduces, but due to the longer tenure, you end up paying more interest than before.

Processing fee: You may have to pay processing fee and other charges on the new loan.

Not a cure for habits: Loan consolidation manages your debt problem, it does not improve your spending habits. If you continue to spend wastefully even after consolidation, you may again get trapped in the debt trap.

Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.