Picture yourself in a situation where you are swamped with debt and losing track of repayments or getting buried under high-interest payments. It is not a very pleasant situation to be in. In addition to financial stress, it would also cause an enormous amount of mental stress to be in such a situation.
There could be many repercussions of being in such a situation. It could be drop-in credit scores due to missed loan EMI repayments, difficulty in getting fresh credit, or even getting harassed by recovery agents in extreme cases.
When stuck in such situations you might wish for a magic wand that could swish away all your debts and you could be relieved. Sadly enough! There isn’t such a solution, but you could try a Debt consolidation loan.
What is a Debt Consolidation Loan?
Before attempting to avail of a debt consolidation loan, make sure you understand what is a debt consolidation loan and in what cases does it prove useful.
Debt consolidation is nothing but availing a single big loan that could help you clear all other smaller loans. This turns helpful when you are dealing with a number of loans and losing track of repayments or have higher interest loans where you are paying a larger sum just for the interest.
You could have a number of loans which could be personal loans, credit card debt, car loans, education loans, loans from the unorganized sector, etc. All these loans could be consolidated into a single loan with a debt consolidation loan. With debt consolidation, one loan would replace all your other loans.
How does a Debt Consolidation work?
You must be wondering how one loan could replace all other loans? Here is how it works –
A debt consolidation loan is a personal loan, either an unsecured one that can be availed without collateral or the one which can be availed with collateral like a fixed deposit, an Insurance policy, mutual funds, gold, or even bigger assets like a real estate property.
You could follow the steps below to avail a consolidated debt loan
- Calculate the sum total of all your existing loans which you would like to consolidate. Here, you would need to take into account that the higher the amount of the consolidated loans, the higher would be your liability.
- Look at which loans would be suitable to replace your existing loans. If you have assets to offer as collateral those loans might prove to be better than an unsecured personal loan in terms of ease of availing and the interest rate.
- It might be good to shop around for loans that fall in a lower interest bracket to save money.
- Apply for the loan and once it is disbursed, use the loan to close all your other loans.
Where to apply for a debt consolidation loan?
A debt consolidation loan is nothing but a personal loan, so you could apply for one with any financial institution like a bank, NBFC, or even online personal loan lenders. If your need for debt consolidation is that of an immediate nature, an online personal loan may prove to be the best choice for you.
Based on factors like age, nature of employment, company that you are employed with, credit score, other existing commitments, and loans the amount offered and the rate of interest may differ between the lenders. So, it is also important to have a good credit score and follow all other rules that you should follow while applying for a personal loan.
Also, applying for debt consolidation with your existing banker may be helpful in getting easier approvals.
Advantages and Disadvantages of a Debt Consolidation Loan
There are many advantages of a loan consolidation loan. Some of them being
- Better management of existing debt
- Can help in lowering the overall interest rate paid on the loans
- The consolidated loan can be restructured so as to meet your financial needs like a longer EMI
- Possible improvement in credit score
Disadvantages of a Debt Consolidation Loan
Though it may sound like debt consolidation is a remedy to all your debt problems, there are some disadvantages too. You should know them before applying for one.
- The consolidated EMI of all loans may turn out too big for you to pay depending on the number of loans you have for consolidation.
- Your credit score may drop if you are unable to pay the EMIs on time
- Your collateral may be at risk if you do not pay back your loan on time.
Is it a Good Idea to Go in for a Debt Consolidation Loan?
A debt consolidation loan may provide you temporary relief from your problems related to debt, but you should keep in mind that a debt consolidation loan doesn’t give you relief from your debts. It just combines all loans in one but the EMI for the consolidated amount will have to be paid, which may turn quite big.
So it is advisable to avail of a debt consolidation loan if you are looking to lower your interest rate or having trouble managing many loans. But always remember that you will have EMIs to pay and make sure you pay them promptly.
Author Bio: Surya Patra is a qualified webmaster by profession and Marathon Runner/Cyclist by passion with more than 6+ years of expertise in the financial domain. Surya is also an entrepreneur, enthusiastic in storytelling, content writing, and digital marketing professional.