From credit card bills to education or gold loans, managing multiple debts is always stressful. Luckily, there’s a way out with a personal loan for debt consolidation. A simple option where you take a personal loan to consolidate and repay all outstanding debts. The best part? Instead of paying several EMIs and juggling different repayment schedules, you pay a single, monthly EMI.
Over the next few minutes, you will learn:
- What is personal loan for debt consolidation
- How debt consolidation works
- Things to check before accepting a debt consolidation loan offer
What Is a Debt Consolidation Personal Loan?
A debt consolidation personal loan is a special type of loan that you can take to repay and close multiple existing debts, like:
- Outstanding credit card balances
- Existing personal loans (usually on high interest)
- Consumer durable loans
- Short-term unsecured loans
- Other high-interest liabilities
Once the selected debts are repaid, you are left with just one loan, one EMI, and one repayment date to track.
How Does Debt Consolidation Work?
Say you have outstanding balances on two credit cards and two personal loans. That means you are making four separate payments every month. With a personal loan for debt consolidation, you get one loan to pay off all four debts and then repay the new loan through a single EMI.
Here’s how debt consolidation works in five simple steps:
Step 1: Calculate Your Existing Debts
You start by listing all your existing debts that you wish to consolidate with the following details:
- Current outstanding balance
- Applicable interest rate
- Monthly EMI or minimum amount due
- Remaining repayment tenure
- Next payment date
- Foreclosure or pre-closure charges
- Overdue amount (if applicable)
Step 2: Compare Offers
Take time to compare personal loan offers for debt consolidation from trusted lenders. Check interest rates, annual percentage rate (APR), processing charges, tenure, and EMI.
Step 3: Apply for the Personal Loan
Submit the following documents for the lender to assess your application for debt consolidation loan.
- Your monthly income
- Your employment or business profile
- Your existing financial obligations
- Your current credit score and repayment history
- Your requested loan amount
- Your repayment capacity to repay the proposed EMI
Step 4. Repay Your Existing Debts
Once the personal loan is disbursed, use the funds to clear the debts included in your debt consolidation plan. Before proceeding, check the net disbursal amount, as there can be some deduction for loan processing charges. For each debt you close, make sure to collect a closure letter or no-due certificate from the respective lender.
Step 5. Continue Repaying Your Personal Loan Via One EMI
After closing your previous debts, you will now continue to repay the personal loan for debt consolidation with only one EMI. We recommend setting up auto-debit on your account so that you never miss a repayment date and maintain sufficient funds in your account.
Benefits of a Debt Consolidation Personal Loan
Here’s a closer look at the key benefits of a debt consolidation personal loan that makes it a viable option for anyone juggling multiple debts.
- One Monthly EMI: A personal loan for debt consolidation helps settle multiple repayments, leaving you with only one monthly EMI.
- Effortless Financial Planning: With a fixed monthly EMI, you get a clear picture of how much money is committed to debt repayment, how much you save, and you can allocate funds better towards regular household costs, insurance, savings, and emergency requirements.
- Potentially Better Interest Management: A debt consolidation personal loan helps you do away with higher interest costs, as the new loan usually carries a lower rate of interest than your existing debts (useful for high-interest credit card balances or short-term loans, like payday loans).
- Improved Monthly Cash Flow: Debt consolidation has been shown to improve monthly cash flow for individuals, as the new EMI is lower than the combined amount paid for existing debts. For example, if the total existing EMIs are ₹25,000 per month, a personal loan for debt consolidation may bring it down to ₹18,000. The difference can be directed towards other important household costs or saved for emergency needs.
- Better Credit Management Through Timely Repayment: A debt consolidation personal loan does not readily improve your CIBIL, as there are other important contributing factors, like repayment history, credit utilization, outstanding balances, number of recent credit inquiries, age, and type of credit accounts.
Things to Consider Before Applying For a Debt Consolidation Loan
A debt consolidation loan is designed to make your loan repayment ritual more manageable. But there are a few vital checks to consider before it’s sanctioned.
- Total Repayment Cost: While a consolidation loan may offer a smaller EMI, it can still cost more overall if the tenure is longer. So, always calculate the total amount you will have to pay over the full tenure.
- Processing and Other Charges: Check all applicable charges before accepting the loan, including the processing fee, applicable GST, documentation or platform charges, late-payment, penal, part-payment, and foreclosure charges.
- Loan Tenure: A longer loan tenure typically results in a smaller EMI but may come with a higher total interest cost. On the flip side, a shorter loan tenure can reduce the overall interest paid, but with a higher EMI.
- Monthly EMI: Before you say yes to the loan offer, take into account things like rent or ongoing home loan repayments, household expenses, insurance premiums, education and recurring medical expenses, emergency savings, and any other predictable annual costs.
- Repayment Ability: Double-check whether you will be able to continue paying the EMI if your expenses rise or your income is temporarily interrupted.
- Credit Score and History: Your credit score, repayment history, and applications to several lenders directly influence loan approval chances.
- Repayment Cost: Don’t jump to saying yes to a consolidated loan offer with a low EMI, as the total repayment cost can be higher for a longer tenure.
Is Debt Consolidation Right for You?
Debt consolidation may suit you if:
- You are having a hard time repaying multiple personal loans.
- You have outstanding balances on several credit cards.
- Your debts have a high interest rate.
- The new loan offers a lower overall repayment cost.
- You have a stable and regular income.
- You can comfortably manage the proposed EMI.
However, debt consolidation may not be suitable when:
- The new loan has a higher total repayment cost.
- Your existing debts carry lower rates than the new loan.
- Most of your existing loans are close to completion.
- You continue relying on debt for regular living expenses.
Pro Tips to Follow Before Choosing a Debt Consolidation Loan
Debt consolidation and controlled spending go hand-in-hand. So, be careful before getting a personal loan for debt consolidation, as clearing your debts and overspending again can do more harm than good. Here are a few tips to consider.
- Know Your Total Outstanding Debt: Collect updated statements from every lender and card issuer. Include accrued interest, overdue amounts, pending charges and foreclosure charges.
- Compare Lenders: Compare lenders for APR, processing fee, tenure, EMI and total repayment amount before choosing one.
- Read the Terms and Conditions Carefully: Review the Key Facts Statement and loan agreement carefully including Interest rate, APR, EMI amount, repayment schedule, processing charges, penal charges, foreclosure conditions, cooling-off period, and grievance-redressal details.
- Avoid Borrowing More Than What You Need: Borrow only the amount needed. Taking additional money increases your debt and defeats the purpose of consolidation.
- Make Every EMI Payment on Time: Set up automatic payments or reminders and maintain enough balance in your repayment account. A missed EMI incurs extra charges.
Why Consider Ram Fincorp for Debt Consolidation?
- Fast Loan Processing: Apply online and receive quick approval for eligible applications.
- Minimal Documentation: Get started with a simple application process and fewer document requirements.
- 100% Digital Experience: Enjoy a secure, paperless loan application from the comfort of your home.
- Privacy You Can Trust: Your personal and financial information is protected with strict privacy standards.
- Transparent Borrowing: We believe in clear communication with no hidden surprises.
FAQs:
Can a personal loan be used to consolidate credit card debt?
Yes, you can get a personal loan to consolidate and repay outstanding credit card balances. When done, you’ll be left repaying a fixed EMI within a predefined tenure. Always compare the personal loan’s APR and total repayment cost with the current cost of carrying the credit card balances before proceeding.
Does debt consolidation reduce the amount I owe?
No, debt consolidation does not reduce any principal amount you owe. However, if you have multiple loans running, a debt consolidation loan can significantly lower the financial burden by helping you close the debts and continue repaying with one single EMI. The overall borrowing cost of a personal loan for debt consolidation is often lower than the total of the multiple monthly EMIs you pay to different lenders at different rates.
Will debt consolidation improve my credit score?
While debt consolidation may help improve your finances, it does not guarantee an immediate improvement of your credit score. However, once you close your existing balances, repaying the new, single EMI timely can better your credit profile over time.
How can I find a personal loan with a low interest rate?
To get a personal loan with a low interest rate, maintain a healthy credit profile, compare offers from suitable lenders, and check your eligibility before applying. Compare the APR without relying only on the advertised rate, as the former gives you a clearer picture of the overall borrowing cost, applicable interest, and other charges.
