Tip: This article is going to be your best guide to debt consolidation with a personal loan. You won’t seek any more information once you read it.
Unplanned expenses are of the way of life. At times, you will find yourself short on funds that will force you to turn to the most common alternative, a personal loan. Personal loans are quite famous for their flexibility as they are suitable for a variety of purposes. From marriage to vacation, or even hospitalization or renovation, a personal loan is our go-to option.
Nevertheless, one of the salient features of a personal loan (opens in a new tab/window) is debt consolidation. While it is generally not a good practice to take up a new loan, sometimes a personal loan can help in consolidating your existing debts.
Too many loan accounts or outstanding payments can adversely affect your credit score along with your financial well-being. If you are in a position of excessive loans and EMI payments, then it is worthwhile considering debt consolidation.
What is Debt Consolidation?
Debt consolidation means settling all your outstanding debts (loans and credit cards outstanding) with one single loan. However, the loan taken to clear all your existing dues should be availed in a strategic manner where the rate of interest is low and has the best offers suited for you.
You can avail of personal loans for debt consolidation from both banks and NBFC’s. However, make sure that the NBFC’s are authorized by the government to lend funds.
Key Benefits of Debt Consolidation:
- Repayment of loans get simple and becomes more straightforward to track
- Interest paid is optimally reduced
- Helps you close your debts faster and become debt-free
- Put an end to being contacted by collection agents
- Improve your CIBIL score.
Why Personal Loan for Debt Consolidation?
Debt has an uncanny way of becoming colossal snowball in our life without us even realizing. Over a while, it will become better to pay EMI for one single loan than as multiple EMI payments for every loan you have availed. That is where the advantages of personal loans come into play. A personal loan is an unsecured loan that can be used for any number of reasons. It does not require any assets like your car, house, and so on.
Moreover, a personal loan is the go-to loan for tackling any kind of expense we encounter in our lives.
Taking up a Personal Loan for Debt Consolidation
The following could be the reasons why you would go for debt consolidation:
1. One EMI payment
Tracking various EMI’s throughout the month can be a hassle. Even if you miss one single payment, there will be implications on your credit score along with a penalty. You would also end up damaging your relationship with your lender. By consolidating your debt with one personal loan, you need to pay only one single repayment every month, thereby improving your credit score and financial well-being.
2. Low-interest rates
The essential rule when consolidating your debts with a personal loan is that you should get it for a lower interest rate. If your personal loan has a high-interest rate, then availing it for debt consolidation can hurt in the long run. Be sure to check with the different lenders and against your current rates while shopping for personal loans.
3. Fixed tenure
Generally, the repayment term of personal loans ranges from 1 to 5 years. You should pay the borrowed amount within this period. Knowing how much you will be paying as EMI’s can help in planning your finances accordingly and become debt-free without any hassles.
Benefits of a Personal Loan for Debt Consolidation
The following are the benefits of taking a personal loan for debt consolidation:
1. Instant approval
Most lenders approve personal loans almost immediately, provided you have your application and supporting documents verified.
2. Ease of availing
You can get approved for a personal loan by applying through the official website of prospective lenders.
3. Immediate disbursal
As soon as your personal loan application is approved, the borrowed amount would hit your account immediately.
4. No collateral
It is an unsecured loan that does not require you to pledge your assets for funds.
The repayment tenure can be chosen at your convenience as the general repayment tenure ranges from 1 to 5 years.
Lenders also offer the clause of prepayment when availing a personal loan. However, there might be a levy of a nominal fee when prepaying your loan. But making prepayments can make you debt-free faster.
Impact of Personal Loans for Debt Consolidation on the CIBIL score
If you have many repayments, it would be difficult to keep track, and you might end up defaulting. This would hurt your CIBIL score. The CIBIL score ranges from 300-900, and having 750 is considered as healthy. But, a single miss of EMI payment can cause this score to plummet.
To avoid such situations, it is best to avail a personal loan and consolidate your debts into one single EMI payment. This will make your repayment schedule simpler and more manageable. Moreover, by keeping up with the repayment schedule set by your lender, you can also gain a positive impact on your credit score.
How to Get Quick Approval of a Personal Loan?
- Maintain a healthy credit score (the higher the score, the more advantageous it is )
- Look at different lenders, but do not submit applications to all of them. Compare and pick the lender who offers the best terms suitable for you.
- Ensure that there is at least a gap of 6 months with no other new loan before applying for the personal loan.
- Your EMI should not exceed more than 50% of your net-take home pay.
- Ensure that you use your credit card diligently without any defaults
- In case you have both secured and unsecured loans, make sure that you can maintain a fair balance between them.
Things to Remember When Availing a Personal Loan for Debt Consolidation
While borrowing a personal loan might seem like a viable solution to consolidate your debts, there are some things that you need to watch out for:
1. Tenure of present debts
You need to check your tenure before borrowing a personal loan for debt consolidation. In case you can finish off the existing loans in a few months to a year, then taking a personal loan is not a viable option.
2. Credit score
The credit score is one of the first factors taken into consideration when a lender decides your loan’s interest rate. A good score will get you a lower interest rate, whereas a low credit score means higher interest.
Getting a personal loan with low-interest rates is better for debt consolidation than a higher interest rate loan. That being established, make sure you have a good credit score to secure a loan with reasonable interest rates.
3. Lender’s criteria
For a personal loan application to be approved, you need to satisfy all the conditions of the lender’s eligibility criteria. They come with specific expectancies regarding your income, age, credit score, and so on. Ensure that you meet those requirements before you start the application process.
4. Compare rates and other charges
Most personal loan interest rates start from 10.99%- 26% per annum, which could be higher as well. So, it is prudent to check the interest rates charged by various other lenders before deciding the suitable bank or NBFC for your personal loan.
5. Repayment term
The standard tenure for personal loan repayment is between 1-5 years. As you are using the personal loan to consolidate your debts and also have to repay the borrowed amount, choose a tenure that is comfortable with your repayment capacity. It should not interfere with your monthly financial budgets and cause a cash crunch.
Making smart and strategic financial decisions with a long-term focus is the direct path to financial success. If debt consolidation through a personal loan can make you a debt-free person, then don’t hesitate to apply for that loan today.
Guest Author: Shruti R