Consolidating Debt with a Personal Loan?
Here are the pros and cons of personal loans for consolidating debt
When you start to think about reducing your debt burden, the whole process can feel a little bit overwhelming especially if you are doing it on your own without consulting a financial advisor.
The first step, i.e. to find out which consolidation loan is the best one for you, may seem to be the most crucial one. But an even more important question is whether you should take a personal loan to pay off your debt?
If you are not well versed in financial products such as loans, you may think that a personal loan is the best option, or perhaps your only option, for debt consolidation. However, this is simply not true. There are plenty of other options that may be more suitable for your needs.
But in this post, we will look at the pros and cons of availing a personal loan as a debt consolidation loan. Hopefully by the end of it, you will know what to do.
Pros of Debt Consolidation with a Personal Loan:
- Quick: Borrowers with a good credit score can get personal loans quite quickly. This means that if you are in a hurry to pay off high-interest credit card bills or loans, a personal loan comes to your rescue rather fast
- Collateral-free: A personal loan is an unsecured loan which means that you do not need to offer any collateral to secure this loan. Just think about it, no more assets on the line for debt consolidation. Looks like a good plan if you want to have unencumbered assets
- Easy to Get: It is easy to get, especially for salaried employees of reputed government and private organisations as well as well-earning self-employed individuals. The maximum loan amount you are eligible for depends on your monthly income
Cons of Debt Consolidation with a Personal Loan:
- High-interest: Personal loans being unsecured loans are relatively expensive since they come at a higher interest rate as compared to other types of loans such as mortgage loans, gold loans and loans against securities
- Lower Loan Amount: The maximum loan amount that you can get is limited for these loans. In most cases, the borrower can get a maximum of Rs. 15 lakh, with a few banks offering up to Rs. 20 lakh under personal loan schemes. With mortgage loans and loans against securities, you may be able to get a higher loan amount, probably even at a lower interest rate, for debt consolidation
- Devil and the Deep Sea: The decision to choose a personal loan may soon seem like a choice between the metaphorical devil and the deep sea. Personal loans are cash cows for most banks and employees have a tendency to push them to meet their targets. But with a high interest rate and other limitations such as prepayment fees or foreclosure charges, using a personal loan to consolidate your debt means you may soon have 1 large high-interest loan rather than 2-3 smaller ones with lesser prepayment or foreclosure charges.
A Final word
Now you know that personal loans are not always the best option for debt consolidation even though they work in many cases. You need to explore your options before zeroing in on one. Using a secured loan may work best as the interest rates are low and you can get a larger amount to pay off all debt.
If you want to learn more about debt consolidation or consolidation loan schemes offered by other major Indian banks, you can check out our consolidation loans page. We also share tips to help you find the best debt consolidation loan options available in the market.