Get Personal Loan upto ₹10 Lakhs in 10 mins!

  • Employment Type

    Is it advisable to get a personal loan to consolidate multiple debts? Check pros and cons

    Personal loan: Instead of managing numerous loans with different due dates, a borrower can focus on only one payment. This can make it easier to stay on track and avoid missing payments.

    MintGenie Team
    Published11 Oct 2024, 10:22 PM IST
    If the interest rate on the personal loan is lower than the rates on your existing debts, you could save money on interest over time.
    If the interest rate on the personal loan is lower than the rates on your existing debts, you could save money on interest over time.

    If you have multiple loans to service and want to repay them in one go, what would you do? Raising a fresh loan doesn't seem like a rational thing to do. You can, however, opt for it if you want to retire the current loans and consolidate them into a fresh personal loan.

    You can do this if you are getting a fresh loan at a lower interest rate. Also, you should take a loan in order to consolidate it when you know that you can repay it easily without getting into a fresh cycle of debt. The consolidation makes sense when the overall amount of the loan is of a manageable level.

    “Taking a personal loan to consolidate high-interest debts can be a strategic move, as it simplifies repayment and potentially lowers the interest rate, resulting in savings over time. For instance, if one consolidates credit card debt with an average interest rate of 36 per cent into a personal loan with an interest rate of 15 per cent, the savings can be substantial,” says Nitin Rao, Head of Products & Proposition, Epsilon Money Mart. 

    "However, it’s vital to ensure disciplined repayment and avoid accruing new debt or using the debt amount for some other purposes. As a caution, this approach is only for those who have a clear repayment plan and stable income," Rao added.

    Also Read | Credit Card Debt: How outstanding balances can put you at financial risk

    But remember that if you are consolidating credit card debt with a personal loan, you could be tempted to use the credit cards again, leading to more debt. Discipline is required to avoid accumulating new debt while paying off the loan.

    These are some of the advantages:

    I. One payment: Rather than managing multiple debts with different due dates, one can focus on only one payment. This can make it easier to stay on track and avoid missed payments.

    II. Lower rate of interest: If the interest rate on the personal loan is lower than the rates on your existing debts (especially credit card debt, which often carries high interest), you could save money on interest over time.

    Also Read | Home Loans: Top 5 banks with lowest rates of interest

    III. Fixed repayment: Personal loans generally have fixed interest rates and set repayment terms, meaning your monthly payment amount will remain consistent. This can provide more predictable budgeting.

    IV. Credit score: Consolidating your debt could improve your credit score over time, especially if you pay down credit card balances, as it could reduce your credit utilisation ratio.

    “Sometimes because of bad spending habits, people get badly trapped in debt. Because of such multiple loans, their EMI becomes 80 or 90 per cent of their monthly income. This is a dangerous situation. In such a case, before additional personal loans, first check whether you can take monetary help from friends and family,” says Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services.

    “If help from family or friends is not enough, and if you have room to accommodate a new EMI, then you can take a personal loan to close the credit card loan. This helps to lower the total EMI amount after the expensive loan gets closed,” Ms Zende adds.

    These are some of the key disadvantages:

    I. Fees: Personal loans may come with origination fees, prepayment penalties, or other costs. These fees can add to the overall expense of the loan, potentially outweighing the interest savings.

    II. Higher overall interest: Some people get a personal loan that leads to repayment period extension. While this could bring down monthly payments, it could mean paying more in interest over the life of the loan.

    Also Read | Credit Card Utilisation: What is it and how does it affect your credit score?

    IV. Credit Score: Applying for a personal loan will involve a hard inquiry on your credit report, which could temporarily lower your credit score. Also, if you miss payments on the loan, your credit could be negatively affected.

    Catch all the Instant Personal Loan, Business Loan, Business News, Money news, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.

    MoreLess
    First Published:11 Oct 2024, 10:22 PM IST
    Business NewsMoneyPersonal FinanceIs it advisable to get a personal loan to consolidate multiple debts? Check pros and cons
    Know your CIBIL Score for free
    Get Instant Loan at Low Interest Rates
    Bajaj Finserv
    Loan Amount Upto
    Upto 40 Lacs
    Tenure
    12-60 months
    Rate of Interest
    14% - 18%*
    Processing Fee Upto
    Upto 1.15% of loan amount
    Axis Bank
    Loan Amount Upto
    Upto Rs 50 Lacs
    Tenure
    12-84 months
    Rate of Interest
    starts from 16%*
    Processing Fee Upto
    1.5% of loan amount
    View More Offers
    Calculators
    EMI Calculator
    Calculate your monthly installment amount for a loan based on the principal, interest rate, and tenure
    Income Tax Calculator
    Choose the right income tax regime & discover your tax savings
    Best offers for you
    Personal Loans
    100% Digital, Zero Paperwork.
    Credit score
    Know your score for Free.
    HomeMarketsloanPremiumMint Shorts