Here's why you should be aware about debt consolidation

The biggest worry after completing higher education abroad, buying that dream car, house or vacation, leaves us with too many equated monthly instalments (EMIs) after taking loans. Though loans have taken care of your life, right from education to unforeseen expenses but handling all the EMIs is not an easy task while managing work and household expenses.

However, one strategy you can think of is reducing your daily expenses, but if you have a significant amount of debt, this may not be the most practical alternative. It makes more sense to consolidate your loans and paying them all at once. A simple approach to accomplish this is with the assistance of a loan designed expressly for this reason.

This low-interest, high-value loan will assist you in repaying your bills in exchange for a single monthly payment. Therefore, consider consolidating your debt and repaying it with a debt consolidation personal loan.

How does debt consolidation work?

Debt consolidation is a process that combines various debts into one for which a single payment is made. This can help you pay off debt more quickly and keep track of how much debt you have.

In general, debt consolidation can be accomplished independently with no risk by transferring or obtaining a debt consolidation loan.

A debt consolidation loan is a sort of personal loan that enables you to consolidate many high-interest debts into a single, lower-interest loan. You consolidate several loans into a single loan with a single amount monthly payment. When used sensibly, a debt consolidation loan can assist you in saving money on interest and accelerating your debt repayment.

Once you have been authorised for the loan, you will receive the funds and utilise them to pay off your debts. The payments may be sent directly to your creditors in some instances. Following that, you’ll begin repaying your new debt consolidation loan on a monthly basis.

Further credit card debt is the most common debt to consolidate because it often has some of the highest interest rates. However, you can consolidate other types of debts, including personal loans, payday loans, and medical bills.

“The first thing to keep in mind is debt consolidation is not debt prepayment. A good debt repayment strategy can help one to save substantial money on interest payments. Debt consolidation only helps you to consolidate all your debt into one. In debt consolidation, you optimize your debt by transferring the high-interest rate loans into one or lesser loans where the overall interest payment is less. Over some time, one should have a strategy in place for debt prepayment after doing a debt consolidation,” said Harshad Chetanwala, Co-founder of Mywealthgrowth.com.

In India, various financial companies and banks are offering this loan. For instance, there is HDFC Bank personal loan, Citibank personal loan, Axis bank personal loan, ICICI Bank personal loan, and Bajaj Finserv personal loan amongst others.

Advantages of debt consolidation

-Debt consolidation loans can be an excellent solution for many people to save money on interest and monthly payments while also improving their credit scores.

-If you have numerous debt sources with a high annual percentage rate, you can save money on total interest if you obtain a debt consolidation loan with a reduced rate.

-Even if you opt for a more extended repayment period, a debt consolidation loan will assist you in avoiding missed payments.

-You’ll pay more overall, but with more manageable payments, due to a debt consolidation loan that lowers your monthly payments but not your interest rate.

– With a debt consolidation loan, you can turn your destructive revolving debt into essentially benign debt that is paid in instalments.

Disadvantages of debt consolidation

-Finding a debt consolidation loan is not always simple. Even so, this is based upon your eligibility, existing financial status, the quantity of money you require, and your credit history.

-While you are anxious about your current payments, avoid simultaneously applying for debt consolidation loans with many banks. This could harm your already low credit score and jeopardise your prospects of receiving competitively priced financing for the next few years.

-Debt consolidation loans are not for everyone; for instance, if you are a seasonal worker with inconsistent income throughout the year, you may not want the commitment of regular monthly repayments.

-Eliminating your debt obligation with an affordable payback plan alleviates both emotional and financial stress. This relaxation may leave you feeling overconfident and may cause you to resume your previous spending habits.

-You may wind up paying more interest, as repaying short-term debt over a long period of time automatically increases the total interest paid.

-In the case of secured debt consolidation, you may risk losing your home or mortgage in the event of a default.

Things you need to know

-The lender charges an interest rate ranging from 10% to 24% per annum.

-Additionally, a one-time processing fee from 1% to 4% of the loan amount will be applied.

-The loan tenure may range between one to five years, depending on your repayment capability.

-The lender accepts applications for personal loans both online and offline. Applicants are not required to present collateral or security in case of secured debt consolidation.