What is a Debt Consolidation Loan? What are the Benefits of Debt Consolidation?
Everything you need to know about debt consolidation loans.
What is a Debt Consolidation Loan?
It is a loan scheme availed by a person to consolidate all debts such as credit card debt, personal loans, consumer loans, education loan and other liabilities into a single loan. As a borrower, you can choose to go about consolidating the debt in various ways but the end goal is the same – to reduce the debt burden.
3 Simple Tips to Reduce Your Debt Burden
Financial experts around the world believe that you can avail a range of benefits by consolidating your debt. Here are some of them:
#1 Single Payment Every Month.
By availing a consolidation loan, you can simplify your life since it will reduce the burden of tracking multiple payments going each month towards the repayment of different loans. With debt consolidation, you only have one EMI going out each month. Just let that sink in. One EMI instead of 3-4 that are difficult to track.
#2 Lower Interest Rate.
Another reason why debt consolidation is so popular is that it helps borrowers find low-interest schemes to replace high-interest debts that they had to avail due to emergencies. Even if the difference in interest rate is slight, it can still mean a lot of money when you factor in the total interest you pay during the tenure of the loan. Every (saved) paisa counts.
#3 Cut Down on Calls from Collection Agencies
Keeping a tab on all the outgoing EMIs can be daunting, especially if you have not set it on automatic. You are bound to miss a payment here and there. In the case of financial issues, this means that you will start getting calls and letters from different collection agents. Not sure how this sounds to you but it is definitely not good for anyone’s peace of mind. By consolidating all your debts into one, you can say goodbye to this stress and sleep peacefully. Wouldn’t you want that?
How to Get Started
Now that we have your attention, let us give a few pointers to get started.
- Compare Interest Rate: If you are handling your finances on your own, the easiest way to go about debt consolidation is to take a look at the interest rate and tenure of the loans and other debts. If your combined loan is up to Rs. 25 lakh, you can simply avail a personal loan from a bank. We recommend checking a few and comparing the terms along with the interest rate.
- Decide on Tenure: A low-interest rate does not guarantee that it is the best choice since tenure plays an important role too – and in most cases, an important one. This is something people do not realise. For example, paying Rs. 50 every month for a year equals Rs. 600 while paying Rs. 80 for 7 months equals Rs. 560. So take your time to do the math and find the best deal. A flexible repayment tenure would be the icing on the cake.
- Pre-payment and Foreclosure Charges: Some other factors that you should consider include the pre-payment and foreclosure terms since you may want to be completely debt-free. Pre-payment penalties and foreclosure charges are only going to lighten your pocket. So opt for banks and NBFCs that do not charge you at all or quite less than others when you prepay the loan.
Best Advice for Debt Consolidation
Anything else you need to do on your way to a debt-free life?
Yes. Pay off the highest-interest debt first. And so on if you cannot repay all your loans at once while availing the consolidation loan. Hint: They are usually the credit card bills.
A Final word
Any financial scheme that helps you consolidate and pay off your debts fits the description of a debt consolidation scheme. If you have credit card debt on multiple cards, you can avail the balance transfer facility and transfer it all to a single low-interest credit card. So, technically this is also an avenue for debt consolidation.
If you want to know more about consolidation loans and specific loan schemes from Indian banks that can be availed for debt consolidation purposes, you can check out our Consolidation loans page. We cover the different loans you can take from various banks in India to get out of debt and become financially independent.