Taking out a Personal Loan to close other loans might be a wise thing to do. But there are some points you should keep in mind. Read on to find out more.
When it comes to loans, you get to think things over more often than not. This is so true, especially for Personal Loans. These loans have a higher interest rate compared to other loans such as Home Loans and Education Loans. So, the question is whether you should take a Short-Term Personal Loan to close other loans. The answer? It all depends. Most times it is not a great idea to use a Personal Loan, that too a Short-Term one, to close your other loans. Ideally, you should start by liquidating your savings and then your investments, before you consider loan options. But there are cases where a Short-Term Loan might prove to be good for your financial portfolio. Here are some scenarios.
Too Much Of Credit Card Debt
In India, Credit Card issuers charge an interest of 24%-36% per year on Credit Card balances. Let us assume you have a Rs. 50,000 balance on your Credit Card and your bank charges you 36% interest per annum on this balance. The minimum payment you need to make per month is Rs. 500. You will need 15 years to pay off your Credit Card balance. In short, you need to make 185 installments. And can you guess what the total interest payout will be? Rs. 1,23,450 – more than double your total Credit Card balance. It does make sense to take a Short-Term loan with a lower interest rate in this case. But wait! Try these before you go in for ‘that’ loan.
- Balance Transfer – Most banks offer zero per cent interest on Credit Card balance transfer for a limited period. For instance, SBI offers 0% interest on balance transfer for 2 months. The interest rate will be 1.7% per month for 6 months. There are other banks that offer an interest rate of 1% per month on balance transfer for a year. Choose these options only if you know you can pay off your balance within a year. Note that normal interest rates will resume once again from the following year. Unless you can pay off your balance during the period of low interest, you will remain in a debt trap.
Additional Reading: Balance Transfer Between Credit Card. Things To Consider.
- Home Loan Top Up – If you have a Home Loan and have been paying it regularly for many years now, you can consider asking your bank for a top-up loan. Usually, the value of a property goes up with time and the bank will consider the new market value of the property if you request for a top up on your Home Loan. Since this is a Mortgage Loan, the interest rates will be in line with Home Loan rates. This is one of the best ways to clear off your Credit Card debt at a low cost.
Additional Reading: Top Up Your Home Loan
- Loan Against Security – If you hold assets such as gold or land, you can consider a loan against security. The interest rates will be lower than that of a Short-Term Loan. You will also be diligent in repaying the loan as your assets are at stake.
If none of these work, you can opt for a Short-Term Personal Loan where interest rates are much lower than the interest rate charged for your Credit Card. Make sure the pre-payment or foreclosure charges are low. Also, ensure that you don’t run up more credit debt after you take a loan.
Additional Reading: Comparing Personal And Credit Card Loans
Too Many Loan Accounts
Suppose you have got a windfall, bonus or inheritance and you have too many loan accounts – Education Loan, Gold Loan, Car Loan, you want to settle those loans but you are short of funds. You can consider a Short-Term Personal Loan. Most banks suggest loan against property for this. However, if you have funds and need only a couple of thousands/lakhs, it is best to go for a Personal Loan.
A Short-Term Personal Loan seems like a loan for leisure activities because of its name. However, those are the activities for which you should never opt for a loan. These loans might be perfect for emergencies or as a last resort option. Check the charges before opting for one and always compare interest rates before you apply.