Do you have multiple debts on your shoulders right now to pay off? Each liability has a different interest rate and due date you need to take care of. Instead of going through with it, have you considered reducing the overall due amount through debt consolidation? You can do this by paying them all off with one single personal loan.
Different types of loans have different interest rates. Vehicle loans start at 15%, while business loans start at 19%. Credit cards have other interest loans, depending on which bank you take them from. The personal loan interest rate starts from 10.99%.
So, suppose you’ve taken a vehicle loan and have a credit card overdue too when you pay them off with a personal loan, your overall loan amount (including interest) will be reduced, of course, before you take the loan. In that case, you’ll have to check your instalment amount using the personal loan EMI calculator.
So, how does this work? Let’s start from scratch.
What is a Personal Loan?
Usually, when we take a loan, we need to place collateral. Most of them have a specific purpose. For example, a vehicle loan can only be used to buy automobiles. An education loan is for paying fees to an institute. However, you don’t need to specify the purpose of taking a personal loan – it can be taken for any expense.
So, to put it simply, a personal loan is an unspecified and unsecured loan that doesn’t need collateral. Usually, it’s more readily available and comes with special offers. Other than using it to cover significant expenses like weddings, you can also use it to pay off multiple loans. After all, there’s no need for you to specify the purpose of taking the loan here.
How Does Debt Consolidation Work?
When you pay off all your debts through a single personal loan, it is called debt consolidation. It combines multiple liabilities with different interest rates into a single debt with one interest rate that is lower on average.
Let’s assume you have two different loans:
You have taken a loan of ₹20,00,000 at 15% p.a. for four years. Your total interest due for the entire loan will be ₹6,71,752.
Another is a loan of ₹10,00,000 at 10.5% p.a. for 5 years. Your total interest due here is ₹2,89,634.
Now, suppose you decide to pay off both in one go. Let’s see what happens:
It will be the 13th month for paying off the first loan, for which you’ll need ₹15,70,092. So, the total amount of interest you ended up paying is ₹3,13,317. This means you saved ₹3,58,435.
Now you might be paying off your second loan on the 20th month. It means you’re paying off ₹7,22,780 right away, which brings down your total interest due to ₹1,58,983. This implies you saved ₹1,30,651.
Now, to pay off your debts, you’re taking a personal loan of ₹22,92,872. We know the individual loan interest rate is 10.99%. It would help if you used the personal loan EMI calculator to check what time duration would suit you. The more your time duration, the more your interest amount and lower the EMI amount.
So far, you saved yourself ₹4,89,086 from both the loans you paid off. You can manage to take your loan for two years only. Your total interest payable will only be ₹2,71,652. So, for all three loans, you’ve paid an interest of ₹7,43,952 instead of paying ₹9,61,386 for two loans.
To Sum it Up
Debt consolidation helps you save money in the long term. Considering that the personal loan interest rate is lower than many other loans, it can help you save a lot of money along with the burden of handling so much debt.