What is Debt Consolidation?
No one wants to be in debt, and if one is into it, they try to get out of it as early as possible. Some situations are tough and it’s hard to avoid getting into it.
For some people over time, they might accumulate several loans that served different purposes such as a personal loan, education loan, car loan, and credit cards loans/bill. This is most common nowadays with young people who have recently started their career, and have a dream of leaving lavish life. To fulfill their dreams they credit cards one after another. After some days a situation comes when they don’t have enough money to repay their loans.
Debt consolidation is one of the best solutions when you are stuck in such a situation.
To clean up the previous loans and to get a loan having low-interest rate or repayment term, people opt for debt consolidation. But is debt consolidation a good idea with personal loans? Let us understand the pros and cons of consolidating debt with a personal loan.
When asked with people who have already availed a personal loan, they said-
Yes it a good idea to take a personal loan to consolidate your debt? The amount which I was paying as EMIs previously has reduced so much after taking the personal loan for debt consolidation.
Personal Loans for Debt Consolidation
If your multiple loans are costing you so much and you want to end them at once, then debt consolidation with a personal loan can help you to end the multiple existing accounts at different lenders at once by channelling them into one monthly bill which will be the EMI for your personal loan.
The money borrowed through a personal loan can be used for a wide range of purposes including repaying your existing debt. The interest rate charged is dependent on the profile and eligibility of the borrower, which includes income, credit score, and debt to income ratio and so on.
Pros of Debt Consolidation through a Personal Loan
Reduces your EMI
Personal loan has the potential to lower your total payable EMI than what you were paying previously. When you have more than one loan on you the total payable EMI towards different loans is too much. And when you take a personal loan to repay your previous loan, you end up by paying EMI only for your personal loan. This reduces your total payable EMI.
A Fixed Rate for all your Loans
When you have different loans the interest rate is also different for all. This is a kind of hassle for the borrower to maintain a track for different loans for their interest rate, payments, tenure and so on.
Availing a personal loan for debt consolidation is the solution to all these. You don’t need to maintain different track records, with a personal loan as a debt consolidation loan you can get a fixed-rate consolidation loan. So you’ll know exactly what your monthly payment will be each month.
No Collateral/Security Required
You don’t need to give any collateral or security against it
Personal loans are unsecured loans which do not require any collateral or guarantor to back-up them. This is one of the biggest advantages of taking a personal loan. This makes the process of borrowing so easy and fast. You just have to fill the form, submit some documents and you are done.
Fixed Repayment Timeline
When you take a personal loan, you have to repay the entire borrowed amount within a particular time as per specified in the loan agreement. On the other hand when you have multiple loans have different repayment tenures for the. This makes things a little complicated. But having one loan against all short all these problems and you have a clear idea that when you loan is going to end and you can plan your future finances according to that.
Boost Your Credit Score
It is possible that due to so many loans and due to more credit utilization ratio the credit score of the borrower falls. When taking a personal loan for debt consolidation, you get a chance to improve your credit score. Maxed out your cards, hurt credit utilization rate. Credit utilization is the ratio of your available credit to the limit which was available to you.
Consolidating your debt with a personal loan could help your credit scores if it leads to a lower credit utilization rate and more on-time payments. So if you take a personal loan and you are timely for its repayment, then your credit score may improve shortly making you worthy for future borrowings.
Cons of Personal loan as Debt Consolidation Loan
You could end up Deeper in Debt
It is the worst case scenario but it can happen only when you are not able to manage your loan properly.
You pay off all your other loans by using a personal loan, here all your previous EMIs end and you have a new EMI. In case you are not able to repay this personal loan, you have to end up taking yet another loan to consolidate this loan. This may take you deeper into the river of debt and it will be so stressful for you then.
Prepayment Penalties and other Charges
When you take a new personal loan, you need to pay a one-time charge called processing fee, along with the GST. Also, when you prepay your existing loan, some institutions charge a prepayment penalty.
Hence before you go with a personal loan to consolidate your previous loan, you should be careful and should calculate these charges before you take the new personal loan.
Go for debt consolidation with a personal loan only when you can save more even after calculating these taxes and charges.
There are many different options to consolidate a debt among which personal loan is one of the best options. Remember debt consolidation always needs better management as you can’t afford to take a risk again. Consider all these pro’s and con’s and make your decision. Don’t forget: debt consolidation does not mean your debts are paid off – it just means that you get to manage it easier and possibly at a cheaper cost.