In a city like Bangalore, where the standard of living and cost of living both are high, loans have become an integral part of people’s life to fulfil their ever-increasing financial needs. As a result, unsecured loans such as personal loans and credit cards are on the top demanded loans. However, borrowing always comes along with financial commitment and if not taken care properly or impulsive borrowing such as borrowing on higher rates, and at non-favourable terms can further result in lots of problems in the future.
What is debt consolidation?
Debt consolidation is basically a process where people combine their multiple loans into a new loan which is at favourable terms such as lower interest rate, affordable EMI, flexible tenure, and prepayment and part-payment conditions. In this process, the amount received from the new loan is used to pay off other loans.
Debt consolidation loan
A debt consolidation loan is used by a loan holder to pay off his/her smaller debts in one go by taking one new loan. While doing this it is important to avail a new loan equivalent to the sum of all smaller loans which one needs to pay off. It is equally important to check for the interest rate of the new loan, as a higher interest rate will result in a higher outgo of money towards the EMI.
A debt consolidation loan is useful to save on interest. Another advantage of taking a debt consolidation loan is- borrowers would now have to make one payment instead of making multiple payments.
Which loans can be consolidated through a debt consolidation loan?
Debt consolidation loans can be used to consolidate loans that are not tied up to an asset. For example, Education loan, credit card loans, personal loan, etc are some of the examples of unsecured loans which can be consolidated under debt consolidation loan.
Steps to follow when planning to consolidate debts
- Analyse your debts/obligations and your outgo towards them.
- The total amount that you owe the lenders, time period or tenure.
- Calculate the total amount which you pay as EMI for your loans.
- Search for a lender who offers a debt consolidation loan at your favourable terms.
- Apply for a new loan for a loan amount which is equivalent of all your previous loans (unsecured ones).
- Once your loan is approved, pay off the other debts which were costing you more.
- Stick to the payment cycle of the consolidated loan.
Use an EMI calculator
How to make sure that the new loan which you are taking will be successful in reducing your debt burden? This is one of the most important questions and one should inquire about this. So, let’s know-how:
Calculate EMI online, based on your requirement you are using an online EMI calculator to know the estimated EMI for your new loan. All you need to do is enter the loan amount, enter the interest rate at which the lender is offering the loan, choose a tenure for which you are comfortable and that’s it, enter the submit button and you will get to know the EMI for your loan. Now, as you know the EMI, you can effectively calculate the difference between the new EMI and your older EMIs (collectively).
If you feel that the difference is remarkable, you should definitely go for the new loan (debt consolidation loan).
*Don’t ignore pre-closure charges for your existing loans while calculating the difference in the total borrowing cost.
When to avail a debt consolidation loan
- To clear your higher-interest debts.
- To gain financial relief
- To clear your credit card debt or to close your personal loan which you availed at a higher rate.
- When you want to consolidate your multiple debts into one.
- When you need more financial leeway to balance credit card, rent payments, and your other obligations.
While credit cards and personal loans are a great way to help you in financial cash crunches, it is also possible to get trapped in bad debt which can further end up impacting your finances negatively. To avoid these issues it’s important to research well while you are availing of any loan. And if you are already there, transferring all your dues with high-interest rates to a new loan that is available at lower rates can simplify your finances and reduce your total outgo towards EMI.