Owing to the rising prices of goods and services, it is tough for an individual to meet their basic and comfort needs with just their salaries. This is why, many individuals consider going for loans to deal with emergencies. However, if these loans are not managed carefully, one can fall into a debt trap.
People may opt for a home loan to invest in real estate, a car/ bike loan for travel and a personal loan for other expenses. Having too many loans can invite financial indiscipline and lead to bankruptcy. To avoid such instances, one can opt for a debt consolidation loan.
What is a debt consolidation loan?
When a person has several ongoing loans with high interest rates, he/she may find it hard to manage them. A borrower may fail to keep track of multiple EMI dates and struggle to pay them. A single failed EMI can drastically reduce one’s credit score, making it difficult to access credit again.
In such a situation, one can opt for a single special loan that helps them to manage their finances better. This is a debt consolidation loan. It allows a person to combine all his/her ongoing loans into a single debt and pay at a lower interest rate.
For instance, Mr Khanra has three ongoing debts, including one credit card and two personal loans. If he finds that it is hard to manage these loans, he can opt to consolidate them. He can opt for a single high-value loan against property to consolidate the three high interest debts. Then, he can repay it slowly via EMIs like any usual loan.
Why is a debt consolidation loan important?
Following are the reasons that highlight the importance of debt consolidation loans:
-
Improves credit score
When a person streamlines his/her repayments with a debt consolidation loan, he/she does not have to repay each debt separately. This helps them manage their finances better and exercise financial discipline. Debt consolidation loan streamlines all ongoing debts to one. Thus, borrowers only need to pay a single EMI throughout the loan tenure.
When borrowers make on-time payments, their credit scores will increase. Individuals with high credit scores can easily meet loans against property eligibility criteria and avail lower interest rates.
Several banks and NBFCs provide pre-approved offers to their long-standing customers with good credit scores. These offers help an individual to get their loans approved more quickly than others. One can check their pre-approved offer eligibility by visiting the portal of their banks/NBFCs and entering their basic details.
-
Lower interest rates
When a person opts for a debt consolidation loan to streamline his/her dues, they can also tap into lower interest rates than individual loans alone. This interest rate depends on their credit score and history and will vary between banks and NBFCs.
-
Single EMI to repay all loans
The main aim of a debt consolidation loan is to simplify one’s loan repayments. This facility allows such borrowers to merge all their outstanding loans into one single personal loan and repay them by a specific tenure. A borrower can also opt for a loan against property for debt consolidation as it comes with no end-use restrictions.
Before opting for one, a borrower must evaluate the debts she/she planning to consolidate. To know the applicable LAP EMI, one can calculate it manually or use a loan against property EMI calculator available online.
-
Might decrease the borrowers’ monthly obligations
When a person opts for debt consolidation, they get to reduce the interest payments. This directly impacts their monthly repayments or EMI. As the new loan’s interest rate is lower, the interest component of their payable amount will also be less.
Thus, the person will need to pay lesser EMI than that of their previous loans. This allows borrowers to build up their finances and credit scores while repaying debt.
-
Borrowers can opt for prepayment
If a borrower’s loan EMI for debt consolidation is comparatively lower than the EMIs for previous loans, it would work for their financial benefit. With proper financial planning, they can save some money after fulfilling their needs and meeting their monthly obligations. They can further use this surplus cash to prepay their EMI and clear their loan before the end of their tenure.
Things to consider while opting for a debt consolidation loan
Here are a few things to consider while applying for a debt consolidation loan to streamline one’s finances.
-
There might be additional charges
Debt consolidation loans may carry additional charges like processing fees and prepayment charges that tend to increase their overall cost. Therefore, before finalising a lender, the borrower must study various services and fees they provide and compare them with others.
Only after conducting a proper analysis of these additional charges and benefits, one should select a bank/NBFC to apply for a loan.
-
Borrowers can change repayment terms
When securing a debt consolidation loan, a borrower can negotiate with the lender to restructure his/her repayment conditions. This means he/she can choose a new tenure or change the interest rate from fixed to floating or vice versa. By doing so, he/she can repay this loan amount at their convenience within the schedule.
-
There are several options for debt consolidation
There are several options one can opt for debt consolidation. Personal loans allow a person to fund any kind of monetary requirement. One may choose to opt for a personal loan to maintain a single debt structure. Personal loans come with flexible repayment terms that make them easy to repay.
Another option for debt consolidation is loans against property. If a borrower possesses an immovable asset, they can avail financing against it to obtain sizeable credit.
-
Credit score determines the loan eligibility
Lending institutions like banks and NBFCs will only approve an individual’s request for a debt consolidation loan if they have at least a good credit score. An excellent credit score will help them earn benefits like low-interest rates and higher loan amounts. Therefore, a person develops a habit of repaying debts regularly without missing a due date.
Furthermore, one must not opt for loans frequently as loan applications initiate a hard inquiry which affects one’s score. Too many applications will bring a drastic drop in their credit score and paint a negative image in the eyes of lenders. With a low credit score, there are chances of lenders rejecting a person’s loan application. Even if they approve it, lenders may charge a high interest rate.
To conclude, we can say a debt consolidation loan allows an individual to regain control of his/her finances by merging all their ongoing loans. It ensures a simple and timely repayment to meet all the outstanding debts at once. Before opting for a debt consolidation loan, one must analyse its pros and cons to closely determine whether it is fit for one’s finances.
