High-rate debt may be pretty distressing. It may hurt the money and even the immediate and long-term financial goals. If one has a lot of high-cost debt, rising EMIs and rates may force one to dive into savings and drain them.
However, other options might help. Obtaining a low-cost personal loan as a debt consolidation loan can be a good choice. There are many reasons why a personal loan may be a good option for debt consolidation. But before that, let’s discuss debt consolidation loans.
What is a debt consolidation loan?
The debt consolidation loan combines many smaller loans into a single loan. After consolidating debt, the person must make one monthly payment instead of many. It may help to manage the finances and get better loan conditions, such as a cheaper rate or EMI sum.
Why take out a personal loan to consolidate debt?
Debt has a nasty way of compounding itself. Personal loans for debt consolidation combine many balances or debts into a single monthly payment. Here are a few points why one might think of taking out a personal loan to consolidate debts:
- Get a hefty sanction without putting up any asset
A personal loan allows one to combine the debt without worrying about finding an asset and its status. One may be sure of receiving the cash one wants without worrying about pawning anything of value since lenders provide larger ticket amounts. Some give consolidation loans up to Rs. 25 lakhs.
- Pay off the new loan at a low rate
Unpaid debt often results in increased fees and rates. Combined, this drives up the year-on-year cost of the loans as one persists in paying interest. If paying off the present debt is complex, the added fees would worsen that case. Using a personal loan to consolidate the debt may reduce late fees and high debt rates. One only has to make one more affordable loan payback.
- Put all of the money on a single EMI each month
One can combine the many debt payments into a single EMI when one consolidates debt with a personal loan. They may manage their money with ease. They can also set up budgets so that the income is directed toward paying off one EMI once a month since there are fewer payment dates and EMIs for one to remember.
- Helps with a lengthy tenure to lower EMIs
One saves money by paying only EMIs and may also ease the monthly money stress by selecting a lengthy tenure. With tenures varying from 12 to 60 months, lenders can be aggressive with payback or ease the urgent burden on the budget. The shortest tenure one can afford is often the best choice since it reduces interest payments.
- Pay in parts with a little more cost
Make paybacks to lower the total cost of the loan when the financial situation improves and one has more money available. When one prepays, they reduce a part of the principal ahead of the scheduled due date.
Factors to keep in mind when getting a debt consolidation loan
Taking out a personal loan as a debt consolidation loan is a great option. This is especially true if many paybacks are becoming a problem. Here are a few things to keep in mind before taking out a personal loan for consolidation of loan:
- Current Debt Term
Check the time of the existing debts before taking out a personal loan to combine them. Suppose one can return all the bills within a few weeks to a year. In that case, one should avoid taking out a personal loan for express debt consolidation.
- Credit Score
One key part affecting the rate a lender charges is the credit score. A person will be charged a low rate if they have a decent credit score. One might incur a high rate if they have a poor credit score. Getting a personal loan for loan consolidation is a smart choice if the rate is low.
Given this, before applying for a personal loan, be sure to check your credit score. Go ahead with the form only if one is sure they have a strong credit score.
- Lender Eligibility Criterion
One must fulfil the lender’s criteria to get a loan. As a result, checking the lender terms is best when applying for a loan. Lenders might have needs regarding monthly income, working experience, age, etc. Before applying for the loan, be sure to fulfil these needs.
- Check Rates & Other Fees
Personal loan rates may be as low as 10.99% per year to as high as 24% per annum, if not higher. As a result, it is strongly advised to check the rates many lenders offer before picking which bank or financial firm to apply to.
- Pay Back Time
People may choose a loan payback time from one to five years. One will be merging the debts and repaying the loan amount throughout this time. They should check the repayment ability and choose an appropriate loan payback tenure.
Will the consolidation of loans with a personal loan impact the CIBIL score?
Checking the EMI payments might be complex if one has many obligations. One may be penalised if one fails to pay even one of the EMIs by the due date given by the lender. Furthermore, skipping the EMI payment may impact the CIBIL score, making it harder to get finances in the future.
To prevent such problems, try taking out a personal loan and combining the obligations with the loan amount. This will ease the paybacks since one will only need to pay one EMI constantly. It will lower the likelihood of skipping EMI payments. Paying the monthly EMI on time, as required by the lender, can assist one in maintaining a decent CIBIL score.
Loans are no longer limited to big expenses such as property purchases or supporting children’s education. Many clients take out loans to cover their living costs and pay for small-ticket items such as consumer durables. Increased credit availability also attracts individuals, particularly those with low credit, to take out many loans at higher rates.
Due to the increased EMI load, they have little left for emergency money or other financial goals.
In such a scenario, the easiest way out is to combine the many debts by taking out a personal loan with a lower rate and, ideally, a long term. Furthermore, the consolidation of loans into a single loan would save the burden of keeping track of many EMIs, due dates, etc.
Check out Piramal Finance for more related blogs on debt consolidation loans and explore their products and services.