Example of Debt Consolidation
Mr. X is facing a situation where he is having two separate loans:
Loan 1: Mr. X borrowed ₹1,00,000 two years ago with an interest rate of 12% annually.
Loan 2: Mr. X took out another loan of ₹2,00,000 with an interest rate of 10% annually.
Each month, he is making payments towards these loans, totalling ₹11,000. This split includes ₹5,170 towards Loan 1 and ₹5,830 towards Loan 2.
Now, let’s explore how debt consolidation could help simplify your payments and potentially reduce your monthly installment: Mr. X decided to reach out to a debt consolidation company to explore options. They reviewed financial situation of Mr. X and offered a new loan with a lower interest rate and a longer repayment term. After negotiations, the debt consolidation company suggests a consolidated loan with the following terms:
- Loan Amount: ₹3,00,000 (to cover the total amount of your existing loans)
- Interest Rate: 9% annually (lower than the average of your current loans)
- Repayment Term: Extended to five years (to lower your monthly installments)
- With the new consolidated loan, you’ll have:
- Lower Monthly Instalments: The new monthly instalment is reduced to ₹6,000, which is more manageable compared to the combined ₹11,000 he was paying earlier.
- Simplified Payment: Instead of managing multiple payments towards different loans, Mr. X now have a single monthly payment towards your consolidated loan.
- Extended Tenure: While the repayment term is extended to five years, allowing for lower monthly payments, it’s essential to consider the total interest paid over the extended period.
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