Shall You Close a Personal Loan with Another Personal Loan?

Highlights

• Shall you close your existing personal loan with a new personal loan?
• It depends on how much will all cost you - Read here the likely cost as well as other solutions

Is your existing personal loan EMI too high for you? Think of suitable alternatives and implement the best one. Otherwise, if you delay employing the right solution, you could default and find yourself in all sorts of trouble. Not only the credit score will come down, but even the late payment charges will mount along with legal complications.

But what are the solutions you have? Shall you take another personal loan at a lower interest rate to pay off your existing loan? Many borrowers are asking this question, but is it the right solution for you? If not, what else do you have? We will talk about everything here. Let’s read!

So Should You Take a New Loan to Close Your Running Personal Loan?

Don’t implement any solution just for the sake of it. Do your loan mathematics properly before deciding. A new personal loan will come with a processing fee, while the closure of existing loan will have foreclosure charges. So, calculate all these and see whether it is a feasible solution for you.

Let’s Calculate

We have mentioned below an example depicting your likely personal loan repayment scenario. It will help you get a feel of the situation.

Example – You took a personal loan of INR 8 lakh for 5 years at an interest rate of 17% around 2 years ago. Now, if you take a new loan at 14%, will it benefit you? It will depend on the overall cost. The processing fee comes at 2% of the loan amount plus applicable Goods and Services Tax (GST). The foreclosure fee levied on closing your existing personal loan is 4% of the outstanding balance plus 18% GST.

So, how much will you pay before the new personal loan EMI begins? Let’s find out!

Loan AspectsAmount (In INR)
EMI Payable on INR 8 Lakh at 17%19,882
Interest Payable on INR 8 Lakh at 17%3,92,924
Interest Paid Till Now2,34,828
Outstanding Loan Balance After 2 Years5,57,658
Foreclosure Fee Applicable to the Closure of Running Personal Loan26,321.48              (5,57,658 x 4%) x 18%
Processing Fee Applicable to the New Personal Loan13,452
Payment to be Made Before the Commencement of New Personal Loan EMI39,773.48
(26,321.48  +13,452)
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Check How We Have Calculated the Processing Fee Above

To close the existing loan amount of INR 5,57,658, you will need to take a new loan of around 5,70,000, considering a 2% processing fee. The fee would be around INR 13,452 including tax. Now, this fee will get deducted from the applied amount and the net amount will get disbursed to your bank account. If we do all the calculations, the net disbursal amount will be around the existing loan balance of INR 5,57,658.

So What Will be the EMI for a New Personal Loan?

Let’s stick to the above example where you could end up paying INR 39,773.48 at the time of new loan application. Now, what will be the new personal loan EMI? How lower is it in comparison to the old personal loan EMI? Let’s find out using the Personal Loan EMI Calculator. Well, the new loan will be around INR 5,70,000 at an interest rate of 14% per annum.

The EMI will also depend on the time for which you are going to take a new loan. Assuming you want a new loan for the time left in your existing personal loan i.e. 3 years, the EMI will be INR 19,481. The total interest outgo on a new loan will amount to INR 1,31,325.

So, the difference in EMI between the old and new personal loan is not much i.e. INR 341 (19,882-19,481). On the interest front, you will pay INR 3,66,153 including the interest you have already paid on your existing loan. If we add INR 39,773.48, the total payment will come as INR 4,05,926.48, which is more than the likely interest payment of INR 3,92,924 on an existing personal loan. So, there’s no worth taking a new loan given the overall obligations.

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Maybe if you can get the new loan at a much lower interest rate, you can think of. Do the calculations and see if the overall interest payment is reasonably lower than INR 3,92,924, if not significant.

But What About When There are No Processing Fees and Prepayment Charges on a Personal Loan?

It’s rare in a personal loan to have no processing fee and prepayment charges. But during the festive season, lenders can come with such offers. Even individuals with strong credit and income profiles can bag such offers. If such an offer comes your way, grab it and reduce your overall obligations. Consider the above example where processing fee and prepayment charges constitute around INR 39,773.48. So, if we remove that, the total loan cost will come as INR 3,66,153, saving you around INR 26,771 (3,92,924-3,66,153) on the overall transaction.

Can You Think About a Personal Loan Balance Transfer?

A personal loan balance transfer is a process by which you can transfer your existing loan to another lender at a lower rate of interest. But you will still need to pay a foreclosure pay to the existing lender and a balance transfer fee to the new lender. Here also, you need to calculate these costs and see whether they reduce your overall interest payment. We advise a balance transfer only when the new interest rate is lower than the existing one by at least 5-6%. Even then, check the cost using the technique shown above.

But some lenders may not have a foreclosure fee and won’t charge on a balance transfer either. If you find two such lenders, a balance transfer will yield you the ideal result.

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What Else Can You Do to Reduce Your Personal Loan Obligations?

If you had the savings to pay off your entire outstanding balance, you probably won’t have thought of taking a new loan. But if you have the savings to pay off the loan partly, do that and reduce your obligations. Let’s consider the above example to understand the same.

So, the 5-year personal loan of INR 8 lakh taken at an interest rate of 17% has an outstanding balance of INR 5,57,658. If you have savings of say INR 2 lakh but can pay INR 1.50 lakh towards the part payment of the loan, how will it play out? Let’s check out!

Loan AspectsAmount (In INR)
EMI Payable on INR 8 Lakh at 17%19,882
Interest Payable on INR 8 Lakh at 17%3,92,924
Interest Paid Till 2 Years2,34,828
Outstanding Loan Balance After 2 Years5,57,658
Part Payment Amount1,50,000
Outstanding Loan Balance After Part Payment4,07,658
EMI Payable After Part Payment14,534
Savings in Terms of EMI5,348
Interest Payable After Part Payment1,15,570
Interest Paid Till Now + Interest Payable After Part Payment3,50,398
Savings 42,526                (3,92,924-3,50,398)

The lender will debit a part payment fee on the amount prepaid. In case the fee is 4%, the part payment charges will come as INR 7,080 including 18% GST. So, the overall savings will reduce to INR 35,446 (42,526-7,080), which is still a decent number.