Most individuals get stuck in debt and think of taking a fresh loan to settle an old one. Although this is a sound financial strategy, it is not always the most suitable option. Knowing when this option is helpful and when it may cause more financial problems is important. This is a closer examination of the pros and cons of taking a new loan to settle outstanding debt.
When Do Individuals Make This Choice?
Individuals take a new loan to settle an old one when their monthly EMI load gets too heavy to bear. Lower interest on a new loan is another frequent reason for debt refinancing. Others who are confronted with job loss, business failure, or unforeseen financial emergencies also choose new loans to settle their outstanding amounts.
When Is It a Smart Step?
If there is a new loan with a lower rate of interest, it will reduce the amount to be paid back and ease the EMI burden. Refinancing may also be advisable if it is possible to restructure tenure and make monthly instalments more convenient. If the new loan has improved terms like lower processing charges or easy repayment options, then it may be a wise move.
Alternatives to Taking a New Loan
If possible, explore other financial options like negotiating with your lender for better repayment terms or seeking temporary relief rather than immediately opting for a new loan.
How to Choose the Right Loan?
Compare interest rates, processing fees, and repayment terms before selecting a loan. Choosing wisely can make a significant difference in managing your finances effectively.
When Can This Choice Be Detrimental?
Borrowing a new loan with a high rate of interest may add pressure rather than diminishing it. Depending on the loan term, paying overall interest for an extended period might be even greater. Binge borrowing with a view to retiring old debts is a classic example of being caught in debt traps, wrecking your fiscal soundness.
What Should You Do?
Borrowing a new loan to pay off an old one is a good idea only if it reduces financial burden and interest rates. But in the absence of planning, it can create more issues. You need to plan your budget, reduce unnecessary expenses, and study all the terms of the loan carefully before you decide. Considering your financial position wisely will assist you in making a decision that will prove beneficial for you in the long term.