In an era where options are plenty, be it mobile phones, electronic gadgets, cars or homes, there are enough options available for financing them too which help us fulfill our needs and desires. And in our quest to have a lifestyle that is far beyond the typical roti, kapda and makaan of the days gone by, we end up availing of all possible financing options by leveraging our income, but only to find ourselves completely overburdened by monthly installment payments on loans, many of them running simultaneously.
It is important, here, to understand that the nature, the terms and conditions of each of these loans would be quite different from one another. While a home loan with a tenure of 20 years can be availed at a rate of 10-11 per cent (depending on when it has been availed), a car loan with a term of five years at 12 per cent or more and credit card outstanding at an exorbitant 42 per cent per annum. Having already become a victim of these financial transactions, it is important that we now apply some prudence and see how to manage it best.
The solution lies in the concept of debt consolidation. In simple words ‘debt consolidation’ means replacing multiple loans with a single loan, often with a benefit in terms of reduced monthly payments. Irrespective of money market conditions, debt consolidation has always been considered as one of the best options to help you manage your finances better.
Easily understood through an example, let us consider Rajesh, an average retail consumer like you and me, aged 30, with a family of three. He is a salaried individual with a net monthly income of Rs 90,000 per month. Rajesh’s current loans are as follows:
Left with less than Rs 30,000 to take care of his entire monthly expenses including his child’s fees, he lives in a tight budget throughout the month. What will he do in case of an emergency other than praying for a miracle to help him tide over the crisis? Alternatively, he can follow the simple steps laid down below:
Step 1 – Rajesh moves his home loan outstanding of Rs 30 lakhs to a different Bank (Balance Transfer) under the current prevailing interest rate of 9.40 per cent with an option to reduce his EMI.
Step 2 – Rajesh takes a top-up of Rs 9 lakhs @ 10 per cent for 17 years on the transferred home loan (assuming the market value of his property has appreciated enough) – to pay off the car loan (assumed nil foreclosure charges), personal loan (assumed nil foreclosure charges) and the credit card outstanding where he is servicing a much higher rate of interest.
Let’s now look at a comparison of Rajesh’s new financial position post-consolidation of his debt.
So, as seen from the above 2 tables, Rajesh has now:
1. Reduced his monthly outgo by Rs 21,365
2. Increased his net monthly disposable income to Rs 51,302 from Rs 29,937
3. Freed his car of any hypothecation
However, on the flip side:
1.He has now mortgaged his house for Rs 39 lakhs instead of the earlier Rs 30 lakhs
2.Will probably spend anywhere between Rs 20,000-30,000 (equal to a month’s savings by consolidating his debt) to get the balance transfer of his current housing loan
3. The Rs 9 lakhs top-up will now be serviced over 17 years as against 5 years and 3 years earlier.
Finally, the choice lies with us. Debt consolidation may just be the answer to ensuring stress-free month-ends and increasing the disposable income in our hands.
The author is CEO, Finanzmart.com