When it is about loans or credit options, you get to think over various factors. This is true, particularly in the case of personal loans. Such loans have a higher rate of interest than other loans like education loans and home loans. So, the major question is whether you must avail of short term loans to close other credit options. The answer? It depends. Many times, it is not a good idea to use a personal loan, particularly the short term one, to consolidate your other credit options. Ideally, you must begin by redeeming your savings and, after this, your investments before considering the loan option. However, there are cases where a short-term loan may prove to be excellent for your portfolio. Here are a few scenarios.
A lot of credit card outstanding
Credit issuers in India charge an interest rate that ranges anywhere between 24-52 percent p.a. on the credit card outstanding. Let’s assume you have a Rs 50,000 outstanding credit card balance and charges you 36 percent interest per annum on balance. The minimum payment you require to make per month equals Rs 500. You will require 15 years to pay your credit card outstanding. In short, you require making 185 instalments. Guess what? The overall interest payout would be Rs 1,23 lakh, which is double your overall credit card outstanding. It makes full sense to avail of short term loans with a lower rate of interest in such cases. However, wait! Ensure to try the listed before you avail of the loan.
∙ Balance transfer: Most banks provide 0% interest on credit card balance transfers for a restricted period. For example, SBI provides 0 percent interest on the balance transfer for two months. The rate of interest will be 1.7 percent per month for six months. There are various other banks that provide a rate of interest of 1 percent per month on the balance transfer. Select these options just if you know you can repay the balance in a year. Remember that the normal rate of interest will resume once again in the following year. Until you repay your balance during a low-interest period, you will stay in a debt trap.
∙ Home loan top-up: if you are repaying a home loan for many years, you can consider asking the bank for a top-up home loan. Generally, with time the property value rises, and the bank considers the latest property value if you request the top up on a home loan. As this is a mortgage credit option, the rate of interest will be in line with home loan interest rates. It is one of the best ways of clearing off your card debts at a low cost.
∙ Loan against security: If you have an asset like land or gold, then you can consider availing loan against security. The rate of interest will be lesser than the short-term loan. Also, you will be extremely diligent at repaying your loan as your securities are at stake.
In case none of the above work, you can avail of short term personal loans through banks like SBI, Axis Bank, HDFC Bank or ICICI Bank. Note that SBI personal loan interest rates are usually lower than private sector banks as SBI is a PSU. However, before you avail personal loan from any of the banks, ensure to use the SBI personal loan EMI calculator or any other lender’s personal loan EMI calculator to compute your EMI as per your affordability. Knowing your personal loan EMI beforehand allows you to make an informed decision and better plan out your expenses as per your budget.
Several loans
Suppose you received a bonus, a windfall or an inheritance, and you have a lot of loan accounts like a gold loan, education loan, or car loan; you would want to settle all these loans. However, you are short of some funds. Here, you can consider availing of a short term personal loan. Most of the banks suggest availing a loan against property for such purposes. However, if you hold funds and require just a couple of funds, it is a suitable decision to go for a personal loan.
Short term personal loans, though they appear like a credit option for some leisure activities, it is not. These loans are best for exigencies or are suitable as a last resort option. Ensure to evaluate the charges before you avail of the loan and always compare the rate of interest before you place an application for it.
Why should personal loans be used for consolidation purposes?
Listed here are reasons why you must avail a personal loan for debt consolidation:
Single EMI payment
When you avail of a personal loan for consolidating your loan, all other loan dues are merged into one, which you must repay monthly. Hence, you do not require tracking various EMI dates or worrying about instalment default.
Lower rate of interest
In place of repaying a distinct rate of interest for multiple loan dues, you can avail new loan at a competitive rate of interest and consolidate it. Doing this can even pull down your monthly instalments, which make them highly affordable.
Fixed loan repayment tenure
Personal finance generally comes with a fixed repayment tenure that ranges anywhere between 1 and 5 years. As you will require repaying your loan amount within a predetermined time period, you can plan out your finances accordingly as well as clear off your dues faster. A personal loan EMI calculator available online can prove handy in such situations.
Improved credit score
The last upside of opting for debt consolidation is it gives your score a good boost. It happens because merging several loans into one lowers your CUR (credit utilization ratio), i.e., the amount that you owe is divided by your overall credit limit. While you might face a slight dip in the score when acquiring the loan, the long-term gains on credit score and savings on interests that you will face are worth it.