Have you heard of the phenomenon to clean up a personal loan by increasing a new one? Or have you ever thought that someone is considering setting up a new loan to erase his countless old debts? This is not unusual, not irrational. Let’s explain why.
Suppose Mr Z has five different loan obligations of so many banks in the running trais. These are the loans that he has taken out over a period of time. Different loans have different interest rates – 11 percent, 11.5 percent, 12 percent, 12 percent and 12.3 percent. Suppose one of the five banks is willing to offer a top-up of his loans and this share amount is large enough to repay all its current obligations.
And ice formation on the cake is that the new loan bears an interest of 11 percent per year. Everyone at his full mind would advise him to seize this opportunity. Isn’t it?
What is loan consolidation?
It is the process of merging several loans in a single loan, usually with one monthly payment and possibly at a lower interest rate or a longer repayment support. Loan consolidation is often used for student loans, but can also apply to other obligations such as credit cards and personal loans.
Why would people choose?
There may be three different reasons to choose:
i) The fresh loan is usually given on favorable conditions.
ii) The term of office of new loan starts again, which means a longer term of office in relation to previous loans and smaller EMIs.
iii) It is useful to remember one loan with one EMI and one date in Comarison to several loans with so many episodes.
What are the things to be careful about?
There are a few things to be careful. These are as follows:
i) the borrower must ensure that there are no hidden costs in the new loan.
ii) Another important factor to consider is that savings on interest are more important than the processing costs of the new loan. Otherwise it is not logical to compensate for a new loan when the extra costs for increasing the savings compensate.
iii) load, but not least the reputation of the lender is fairly good in the market. Institutions with a bad reputation generally have poor customer service and in the case of a problem with extra costs – you should be able to coordinate with customer service.
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