What Is Debt Consolidation?
Debt consolidation refers to the act of availing a new loan to pay off existing debts and liabilities. Managing multiple debts at once can be overwhelming and if they are of high-interest rate, things become even more frustrating. Consolidating all your existing loans into one makes it much easier for the borrower, as now he/she needs to pay EMI only for 1 loan. This way debt consolidation helps you to manage all your existing obligations through a single EMI.
How to consolidate your existing loans?
You can manage your existing loans and their EMIs effectively by going with a new Personal loan. Yes! You can indeed use an unsecured personal loan for debt consolidation.
What you need to do is-
- Calculated the outstanding amount of your existing loan.
- Calculate the total amount which you need to pay towards the EMI for your existing loans.
- Now check for the availability of debt consolidation loan/personal loan at lower rates.
- Apply for the loan amount which is equivalent to the amount you owe to other lenders.
- Once your loan is approved, prepay all your previous loans with the money you get from your new personal loan.
- This way, now you have only one EMI as all your previous loans are closed now.
How does debt consolidation loans work?
With a debt consolidation loan, you can get financing up to ₹25 lakh at lowest rates of interest and can repay all your debts easily. This loan can be availed from any of the lenders who offers the personal loan. Being unsecured in nature, you don’t need to provide any collateral or guarantee to back up your borrowing.
Generally what happens is – Personal loan is taken to consolidate all other consumer debts, such as a credit card loan, a two-wheeler loan, and a personal loan with a high-interest rate.
Thus, multiple debts are combined into a single, larger piece of debt, this is mostly done to reduce the total payable EMI or to get more favourable payoff terms. These favourable payoff terms may include a lower interest rate, lower monthly payment, or both.
Who can avail a debt consolidation loan
Debt consolidation needs to be opted by individuals who are repaying multiple debts such as a Student loan, personal loan, credit card loan, two-wheeler loan etc. Several debts with different EMIs makes it different for the borrower to manage them properly. On the same hand paying different EMIs for many loans as a whole can be quite a huge amount and difficult. It’s also possible that while managing several debts one might miss out on a repayment date of a particular loan. Thus, if you are in a situation like this, it’s better to go for debt consolidation and get a personal loan to repay your existing obligations and make your life more relaxed and stress-free.
Enlisted below are features of debt consolidation personal loan by Finance Buddha-
- Get a personal loan for debt consolidation up to 25 lakhs
- No Collateral required
- Lowest interest rates
- Flexible loan tenure
- No paperwork is required!
- Completely online process.
- Get Instant approval.
Does Debt Consolidation affect Credit Score?
Managing multiple debts and their EMIs with timely payments is quite stressful. This can also affect your CIBIl score as there are chances that you can miss EMI dates and thus the payments. This can also lead to the imposition of late payment penalty charges. However, this is not just restricted to late fines but can also affect your CIBIL to a great extent. Missing the due date of payment leads to a negative entry on your credit report, which will affect your credit score negatively.
However, there are still changes to correct all this just by opting for a debt consolidation loan. A debt consolidation loan makes payments of your debt easier, as all your loans are closed, and you are left with a single EMI. This reduces the chances of missing payments for multiple loans as before. And also making regular and timely payments without defaulting on a single EMI will show a positive impact on your credit score.
Advantages and Disadvantages of Debt Consolidation Loans
- Debt consolidation is a great tool to reduce the financial burden for those who have multiple debts with high-interest rates.
- Debt consolidation loans convert your multiple loans into a single loan at lower rates.
- By going with a debt consolidation loan you save more on interest as your total payable EMI reduces.
- Debt consolidation loans are widely available in the form of personal loans.
- With a debt consolidation loan, you can even become debt-free in less time.
- A debt consolidation loan can also bring your CIBIL score on track as instead of several EMIs you will be paying only one.
- With a debt consolidation loan, you may be paying less on interest rate interest and thus on your EMI, but it is important to calculate your total borrowing cost, as with long tenure you may be paying more in long tenure.
- By consolidating your multiple loans into a new one, there are chances that your credit score gets negatively impacted. This may happen because credit scores favour longer-standing debts with more-consistent payment histories and the sudden closure of your several loans may impact it.