Thread by @iam_balaji

#personalfinance #debt #fingeekid Just wanted to share my thoughts on debt consolidation and how if managed effectively it can reduce the overall interest outflows.
When an individual has a couple of debts which is being serviced through multiple EMI’s, it's always advisable 1/14

to explore options to consolidate debt. This is possible mainly when one has taken a housing loan and has serviced a couple of years of debt or that the property has appreciated from the time it was acquired. 2/14

This is explained in the example below: Value of Property Purchased say is 1 Cr – Loan to Value is say 80% and 80L, a 20 Year EMI @ a Floating interest Rate of say 9% is 71,948, In addition to this this individual has a Personal loan of 6L and a Second-hand car loan of 3/14

10 lakhs and the EMI and interest outflows are estimated as per the table below: 4/14

The basic assumption to the Consolidation is that housing loan has been serviced for a couple of years and the property value would have appreciated during this period. In the underlying example the housing loan company would offer a top up loan on the existing property 5/14

The existing loan + top up would be restricted to approx. 75% of the Revised property Value by the Bank (this varies from Bank to Bank but would be at least 75% on a conservative basis). The top up Required would be 16 Lakhs and the Property value should have appreciated by 6/14

around 30% over the period of x years of servicing the loan. Loan to Value would be 75% of 1.30 Crores now which would be 98L. Top up Loans are usually around 25 to 50 basis points costlier than a housing loan – this depends on the Bank and the credit score of the individual 7/14

It is also advisable to negotiate better with a different loan provider to migrate the housing loan on a precondition to give sanction for a top up loan. The new provider would be hungrier for the overall loan rather than the existing loan provider. 8/14

This however would entail the paperwork and hassle of loan transfer – a small price to pay in the overall picture. Assuming the top up is sanctioned at 9.25% as against a housing loan of 9.00%, it is advisable to take a top of for 16L and clear the other debts. 9/14

Once the debt is consolidated I would strongly advise that one doesn’t reduce the overall EMI outflow which was expended in the earlier scenario.This is what reduces the overall tenure of the Housing loan and the interest outflow’s over consolidated tenure of the loan. 10/14

It is assumed that the top up loan is disbursed at 9.25% and the weighted average loan rate of 80L @ 9.0% & Top up Loan @ 9.25% comes to 9.05%.Keeping the same EMI outflow of 119,708 as per the earlier scenario – the Housing loan tenure can come down by 240-124 = 116 Months 11/14

which is nearly 10 Years. The potential interest saves would be approx. 45L over the period of the housing loan.
Couple of important points to consider to reduce housing debt:
With every annual increase in salary – proportionately increase the EMI also by at least by 10% - 12/14

or Biannually by 15% to reduce the tenure of the loan consistently.
Always keep an eye out for interesting loan offers from other Banks @ lower rates or if a specific subvention scheme is offered for new loan disbursements to transfer housing loans. 13/14

Keep a track on CIBIL scores on a regular basis and clear off any disputed dues with card companies and others at the earliest as this affects your credit score.
Banks are moving to differentially priced loans for higher CIBIL scores, hence higher CIBIL is very critical.14/14