Debt Consolidation is combining multiple debts/loans of small and big size into one single debt. This not only helps you to combine your multiple EMIs into a single one, but also saves you some money. Juggling between too many payments is definitely not an easy task. There are even times when you miss the payment date just because of confusion. Most of the time when there are too many payments to be made, it ends up consuming most of our earnings. 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, this is because making minimum payments accumulates interest and in the long run you end up paying more. So, in a scenario where you have multiple loans or you think a major part of your earning is going towards serving loans, then it is definitely the time to consider debt consolidation.
Benefits of Debt Consolidation loan:
- Improves Credit Rating:
If an individual is able to make regular payments towards the outstanding debts, then the credit scoring gradually increases. 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 important to check the credit rating. This is suggested because you can only avail of a debt consolidation loan at a good CIBIL score.
- Reduces Your Total EMI:
By consolidating your debt you will be able to convert your multiple EMIs into a single one, making it affordable for a longer tenure. Doing this helps you to manage your debt in an easier way and on the same hand helps to 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 as they are 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 in order to avail of it, you first need to check what your outstanding debt is and then try to ascertain the credit risk by monitoring the CIBIL score. Banks approve a debt consolidation loan only for those who are regular with payments for the previous loans. In case 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.
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 quite effective in reducing your financial stress. But, before you apply, it is important to do some calculations and know the exact savings which you are going to make. Also, remember a good CIBIL score and time repayments are the keys to get loans approved at lower rates.