Are you worried about personal loan EMI? Know these things before adding it to another loan, otherwise you will incur loss

In today’s modern era, it has become very common to take more than one personal loan to meet your financial needs. But when every month two, three or more loan EMIs are deducted from the bank account on different dates, then the entire budget of the middle class families gets completely shattered. To avoid this mental and financial stress, these days the trend of ‘Loan Consolidation’ i.e. combining all the small loans into one big loan has increased rapidly. As easy and attractive as this option of one EMI and one bank may sound, in reality it is not always a profitable deal for you. One wrong financial decision taken without thinking can send you into debt for life by increasing your total interest costs drastically.

What is loan consolidation and when does it get its real benefit: Understand the mathematics of interest rates.

Under loan consolidation, financial institutions or non-banking financial companies (NBFCs) transfer all your existing active personal loans to a new loan account, freeing you from the hassle of remembering the payment dates of different loans. According to banking experts, you can get the real benefit of this process only and only if the annual interest rate of the new loan is much lower than the average interest rate of all your old loans. If there is no major difference in the new interest rate, the new processing fees charged by the bank, huge documentation charges and other hidden administrative charges will completely wipe out all your projected savings in a jiffy.

Don’t be fooled by low EMI: Increase in loan tenure will put double the burden on your pocket.

Loan merger advertisements often attract customers by luring them with extremely low monthly EMIs, but a wise consumer should avoid this deception. Banks and finance companies cleverly extend the tenure of your loan to reduce the monthly installment. For example, a loan that was supposed to be repaid in two years increases its tenure to five years. Small installments provide relief every month, but due to compound interest being charged for a long time, in the end you have to pay more in interest than the principal amount, due to which overall you have to suffer huge financial losses.

Credit score game and prepayment charges: Keep these things in mind before taking a new loan

Before applying to merge loans, you should carefully assess your current credit score. If your CIBIL score has improved over the years due to your timely payment habits, you can bargain for a lower interest rate and better terms from the bank. On the contrary, if your financial condition has weakened, the bank may offer you an even higher interest rate than before. Another most important thing is that when you foreclose your old loan, the old bank will charge you prepayment or foreclosure penalty. Therefore, before agreeing to a new loan, write down all these charges on a paper and calculate the total expenses.

Danger of getting trapped in debt again: Financial discipline is the most important weapon

After loan consolidation, when many EMIs are reduced to just one small installment, many consumers consider their disposable income to have increased and start taking credit cards or new personal loans again. This habit traps them in a terrible debt trap from which it becomes impossible to get out. If you are merging loans with complete financial planning and discipline, only then it will prove helpful in improving your CIBIL score and becoming debt free. Any hasty decision based only on the size of the monthly EMI can take away your financial freedom in the long run.