Personal Loan: Is it wise to borrow to repay current debts? Key things to keep in mind | Mint

Do you have a number of financial obligations aka personal loans and planning to redeem them by raising a fresh one? This is not a bad idea, nor is this unprecedented but whether you should opt for it or not – let us dig deeper and find an answer.

These are some of the factors which you need to consider before you opt for it.

Loan to repay debt: Makes sense in these scenarios

1. When your debt obligation is large while the rate of interest is exorbitantly high at the same time.

2. Fresh loans are being offered at a concessional interest rate. This way you can save money by way of interest differential between the two sets of loans.

3. The new loan is being offered by a bank with which you share a good banking relationship. And your intent is to take the current loans to a good banking partner.

4. When the loan loan is a refinancing and the previous loan’s tenure is close to completion. This happens when your financial situation has undergone a change and you need some more time to clear your current debt.

5. When the current loan obligations relate to a number of financial institutions. And it becomes enervating to coordinate with multiple institutions. You might as well want to reduce those obligations to one single loan.

For instance, when you have four loans with a total obligation of ₹10 lakh from different institutions – it is advisable to take these loans to one single loan obligation of ₹10 lakh instead.

Loan to repay debt: Scenarios to avoid

Meanwhile, it is important to avoid these scenarios for taking out fresh loan to repay the current obligations

1. When interest on a new loan is higher than that of current loan obligations. for instance, currently you are paying 10.5 percent on your current loan whereas the new loan is being offered at 11 percent. Why would one opt for it? Isn’t it?

2. When you are unsure about the new bank which is promising to offer a new loan and might even levy hidden charges on the loan.

3. When the loan amount is too small to bother with a new obligation. When your loan is towards redemption, you should not contemplate raising a fresh loan to repay it.

(Note: Raising a loan comes with its own risks. So, due caution is advised)