Debt Consolidation – What Does It Mean?
A loan is not something a new concept in money market. Many a people are dealing with several secured and unsecured debts in their lives every now and then. Having said that I would like to mention here that most of us get confused while making decisions related to money. For example if you have a bad debt what will you do to recover from it, or what if you have multiple debts and getting trapped in high interest rates every month. Debt consolidation can be the solution here. If you are still confused about what debt consolidation is, then here I am with a detailed description.
Debt consolidation is generally used to indicate one single debt against the multiple debts. It is a single new loan that you take out to pay your other loans if you have multiple debts in market. Normally, in general debt consolidation is used to finance multiple non-asset debts such as credit card bills, students’ loans, medical expenses, payday and such. If you are availing debt consolidation then you are simply signing a single cheque every month instead of 4 -5 different cheques to the creditors. Debt consolidation is an apt loan to get rid of long term debt burden.
How Does It Work?
First and foremost thing that you should know before knowing the process of debt consolidation is that it does not bring up the portion of money you owe. It is simply a new single loan that will help you to repay your other existing loans. In debt consolidation there is a single creditor. You need to pay your single creditor every month and the creditor will take care of your other loans for the rest of the month.
In debt consolidation you need to repay the new credit along with the interest rates like the other debts. So only avail debt consolidation if you are ready to repay the debt. Another thing is important while processing debt consolidation is it is more into unsecured debts than secured debts. Credit card payments, rent payments, medical or utility bills can be covered by Debt Consolidation while home or auto loans can be troublesome as they come with some collateral.
Types of Debt Consolidation Loan
- Debt Consolidation through Secured Loans
Consolidation of all your unsecured debt to one secured debt can be done by taking a Mortgage loan, Loan against property, equity, Gold, Life insurance policy etc. The advantage of opting for a secured consolidation is that you will have to pay a lesser rate of interest on your loan. This is because the loan is secured and it reduces the risk involved to the lenders. This makes it is more affordable and if your loan is against real estate you might also get tax deductions too.
- Debt Consolidation through Unsecured Loans
This is also a good option for a debt consolidation if you don’t want to or don’t have any collateral to pledge. This is quite a common way to consolidate once debt. Most of the banks offer unsecured debt consolidation at a lesser rate. But before you go for it, it’s important to check with the banks if they can provide you any offers such as low-interest rate or no interest rate for the first month or if they have any other. The benefit of unsecured debt consolidation is that your collateral is not at any risk.
Personal Loan as a Debt Consolidation Loan
A personal loan can opt as a debt consolidation loan, which is totally unsecured and can be availed in quite easily with most of the banks.
- Features with a personal loan as a debt consolidation loan
- No collateral required.
- No need to give anything as security
- Repayment can be done through EMI
- Offers flexible tenure
Advantages of Debt Consolidation Loans
- You only have one monthly payment to worry about
- You get a chance to consolidate at a lower interest rate compared to your previous debts.
- Debt consolidation loans save your money
- This loan is offered for a time period of typically 2 -5 years, this means you have this time period to clear your debts.
- There are generally no fees or charges involved for this loan if you borrow money from a bank or credit union
- Last but not the least it reduces the burden of debt and provide you a piece of mind.
Bad Credit Debt Consolidation
Bad credits can be harmful for your financial records, but consolidate your bad debts is even worse. If you wonder what bad credit is and how you will get to know about your credit is bad or not then let me spill the beans here.
Bad credit is when you have unsatisfied credit records or low credit score. Talking about credit records you must take into account that only payment defaulters are not with bad credit records, there are many of them. If you are a new borrower then you don’t have any records at all. In this case, not directly but, you still fell into the bad credit record’s category. On the other if your credit score board shows any number less than 620 then you are in bad credit mate.
Equifax and CIBIL are the agency names under which you can check or calculate your credit score. You can visit their websites to know more about it.
Anyways, the point is not how bad your credit is, the point is whether you should opt for debt consolidation in bad credit or not. The answer is straight. It is a big NO. Generally consolidating such bad debts bring up the debt burden on the debtor. Mostly if you try to consolidate your bad credits then you have to pay more interest rates and more monthly payment as well. Though you will find a number of companies that promise you to lighten your debt burden through debt consolidation for bad credits however it will be wise if you think twice before jump into any conclusion.
Bad credits can arrive in secured or unsecured loans. Debt consolidation is apt for unsecured loans but bad credit in unsecured is way too worst for any debtor. So if we put aside the complications and think as a normal human being the debt consolidation will make your bad credit even worse one.
Debt Consolidation – Myth and Truth
Debt Consolidation is attractive. If we follow the myth then one must go for consolidation as it allows you to pay less on monthly basis and yeah it offers less interest rate as well. Wow! Is not it attractive? Yes it is. But do you know how things happen behind the curtains. If not then let me show you what is in the closed door.
Debt consolidation offers you to convert your multiple loans into a single one. They also offer you low interest rate and lower monthly payments. Now think about it, your loan amounts are still the same then how can consolidating debt can reduce the amount or interest rate. They don’t in real. They lower the monthly burden because they extend the time period of the repayment. With debt consolidation loans you may need to pay for long time, but it will be benefitted as the amount is now less.
Banks that provide Debt Consolidation Loan in India
Citibank, HDFC Bank, ICICI Bank and Kotak Mahindra Bank are the leading names in India that provide Debt Consolidation Loans in India. On the other Bajaj Finance Pvt. Ltd., a well known financial company also provides debt consolidation loans to its existing customers. In case of Bajaj Finance, if you clear 3 monthly installments successfully, you will be able to take multiple loans after that.
Get Rid of Debts on Your Own
Having debt consolidation and such you can still get rid of your loan burden by strengthen the saving portion. Mostly the bad debt or the heavy debt arrives due to under-saving and of course over spending. If you have sound saving to feed your debts in emergency then you should go for consolidating your debt. On the contrary if you are not at all ready to finance your emergency situation then debt consolidation will not be very wise decision for you.