Multiple Loans vs a Consolidated Loan – Which Helps You Save More?
Last Updated : Dec. 10, 2020, 7:11 p.m.
At a time when there are loans for everything, it’s not a surprise to see someone having more than one credit. Multiple debts mean different repayment structures and require financial discipline from borrowers. Otherwise, if a default takes place, not only will the credit score come down but you could even be ineligible for credits later. There’s an alternative though for all of you who are facing the hassles of multiple loans. Yes, you heard it right! A consolidated loan combining all your debts into one at a uniform interest rate is one alternative. But will it reduce your outgo? Or will it give you that flexibility you need amid multiple loan payments? Let’s find out here!
Let’s Check First – How Can You Consolidate Multiple Loans?
If you have all your loans and credit cards from one lender, the transition to a consolidated loan happens quickly. A request for consolidation is what you need to place before the lender and get it executed soon. Depending on the consolidated debt amount and your repayment track, the lender will decide the rate of interest. Whereas if more than one lender is involved, you will need to switch all your debts to one lender using the balance transfer process. You will need to get the No-objection Certificate issued from your present lender and submit it to the new lender to ensure a balance transfer. But the lender where you switch will also matter. Look to switch all to the lender which charges you the least interest rate for a consolidated loan.
For credit cards, you can take a personal loan to close out its outstanding balance and pay the EMI at a lower interest rate for the period you choose. Even the loan you take to clear credit card outstanding will form part of a consolidated loan.
Let’s Compare Multiple Loans and a Consolidated Loan
After looking at the process by which you could consolidate different loans, it’s time we compare multiple loans and a consolidated loan based on different aspects. The comparison will help us know the better of the two. So, without any further delay, let’s start comparing.
Cost of Multiple Loans and a Consolidated Loan
This holds the key to whether you should continue paying multiple debts separately or get them consolidated to pay once a month. As told above, different loans will have a different rate of interest and a different repayment structure. With debt consolidation, you will get the benefit of a uniform interest rate. But that does not mean lower outgo with the same. The cost will depend on the difference between multiple debts and a consolidated loan. But an example below will give you an idea about the option you should avail. Let’s check!
Example – Suppose you have a 5-year personal loan of INR 5 lakh at 15%, a 3-year consumer durable loan of INR 70,000 at 17% and a credit card debt of INR 80,000 at a 30% interest rate. While you have been paying the personal loan EMI of INR 11,895 for 2 years, the consumer durable loan EMI payment of INR 2,496 is happening for a year. If you continue at this rate, the total interest outgo for these two loans will amount to INR 2,33,543. And, if you add the interest you are paying for a credit card, the total outgo must have been much more.
If the interest is getting levied on your credit card , it means you are paying the due partially and not fully. Else there won’t have been any interest payment. With successive shopping, the credit card debt will expand beyond INR 80,000 at a 30% interest rate. So, swapping your credit card debt with a personal loan at a lower rate of interest will anyways make sense.
If all three debts are amalgamated into one personal loan at 14.50% and continue for three years, how will it impact your outgo? Let’s find out!
Repayment Structure of a Consolidated Loan
| Repayment Aspects | Amount (In INR) |
|---|---|
| Outstanding Personal Loan Balance | 3,43,137 |
| Interest Paid So Far on a Personal Loan | 1,28,616 |
| Outstanding Consumer Durable Loan Balance | 50,476 |
| Interest Paid So Far on a Consumer Durable Loan | 10,425 |
| Total Balance of a Consolidated Loan (Including the Credit Card Debt of INR 80,000) | 4,73,613 |
| EMI Payable at 14.50% | 16,302 |
| Interest Payable at 14.50% | 1,13,267 |
| Total Outgo | 2,41,833 |
So, you could wrap up all these debts in 3 years from here on by paying INR 2,41,833 overall. Else by continuing to revolve credit card debt, you could push yourself into deep trouble.
Streamlining of Payments
Different debts when paid separately will have different due dates, potentially causing a problem of payment delays. And if you meet with a sudden rise in expenses, you could even miss a payment or two. This is where a consolidated loan framework can help you! It will allow you to pay a specified amount on a specified date each month and stay free afterward.
Credit Score
While payment delays may not reduce your credit score , payment skips can! With different dates, the scope for payment skip is immense. So even from a credit score perspective, a consolidated loan will do wonders for you! Keep in mind to have the amount ready for a deduction on the specified date and lay the foundation for a good credit score.