Debt Consolidation is combining multiple debts/loans of small and big size into one single debt. This helps you converge your numerous EMIs into one and saves you some money. Juggling between too many payments is not an easy task. When there are too many payments to be made, it consumes most of our earnings. There are even times when you miss the payment date just because of confusion. And opting for debt consolidation is a solution to all such problems.
Paying just minimum payments on the bill will lead you to a financial crisis because making minimum payments accumulates interest, and in the long run, you end up paying more. So, it is time to consider debt consolidation when you have multiple loans or think a significant part of your earning is going towards serving loans.
Benefits of Debt Consolidation loan:
- Improves Credit Rating:
Credit scoring gradually increases if an individual can make regular payments towards the outstanding debts. And as debt consolidation loans decrease the EMI burden, it makes it even more convenient and affordable to make timely payments, which improves the credit rating. Also, before you apply for a debt consolidation loan, it is essential to check your credit rating. This is suggested because you can only avail of a debt consolidation loan at an excellent CIBIL score.
- Reduces Your Total EMI:
By consolidating your debt, you will convert your multiple EMIs into a single one, making it affordable for a longer tenure. Doing this helps you manage your debt more efficiently and, at the same time, helps save more so that you can focus on investment.
- Reduces Rate of Interest:
Those who have more than one high-interest rate loan, be it multiple credit card loans, personal loans, or vehicle loans, can consolidate their loans into a single loan to bring down the interest rates. Generally, personal loans are used as debt consolidation loans available at affordable rates. So, when you get an option to reduce interest rates on existing loans, you should never miss it.
Things to Consider before you decide to go for a Debt Consolidation Loan:
- List down all your existing loans.
- Look for debts that are close to the end of loan tenure and exempt them.
- Check for debts that have pre-closure fees.
- Find a lender who is offering a debt consolidation loan.
- Compare and pick the best debt consolidation loan and lender.
- Do the Maths, Calculate the difference between total previous EMI and new EMI.
- Go for this only if you are able to save a good amount.
How can you apply for a Debt Consolidation Loan?
You can apply for a debt consolidation loan from any bank or NBFC. But to avail of it, you first need to check your outstanding debt and then ascertain the credit risk by monitoring the CIBIL score. If the borrower has a low credit rating and bad payment records, banks will hesitate to offer loans as they will not be ready to take the risk. Banks approve a debt consolidation loan only for regular payments with payments for the previous loans.
However, the steps include:
- Check your credit score.
- List down your debts and EMI.
- Compare loan options.
- Apply for the new loan.
- Close the existing loan with the money you get from the new loan.
- Take the NOC certificate of the previous lenders.
- Start making repayment towards the new loan.
Debt consolidation loans are widely available and are pretty effective in reducing your financial stress. But, before you apply, it is essential to do some calculations and know the actual savings you will make. Also, remember a good CIBIL score and time repayments are the keys to getting loans approved at lower rates.