The act of taking out a new loan to pay off other liabilities and consumer debts is referred to as debt consolidation. Multiple obligations are consolidated into a single, larger liability, such as a loan, with better payoff terms—a reduced interest rate, a lower monthly payment, or both. Student loan debt, credit card debt, and other liabilities can all be addressed through debt consolidation.
Debt consolidation is the process of consolidating many minor and large debts/loans into a single debt. This allows you to consolidate your multiple EMIs into one and save money.
Handling many payments is a difficult task. When we have too many payments to make, it takes up the majority of our earnings. There are even situations when you miss a payment deadline due to a mix-up. And debt consolidation is a solution to all of these issues.
Making only minimum payments on your account will lead to a financial catastrophe since minimum payments collect interest, and you will end up spending more in the long term. When you have many loans or believe a large portion of your income is going toward servicing loans, it’s time to think about debt consolidation.
Benefits of debt consolidation Improve Credit Rating:
If a person can make regular payments on their loans, their credit score will progressively improve. Furthermore, because debt consolidation loans reduce the EMI burden, making regular payments is even more convenient and inexpensive, which improves the credit rating. It’s also a good idea to verify your credit score before applying for a debt consolidation loan. This is recommended because a debt consolidation loan can only be obtained with a high CIBIL score.
Reduce your total EMI:
By combining your debt, you can reduce the number of EMIs you have and make them more reasonable for a longer period of time. This allows you to manage your debt more effectively while also allowing you to save more money so that you may focus on investing.
Reduce the rate of interest:
Those with various high-interest rate debts, whether credit cards, vehicle loan, or personal loans, can consolidate them into a single loan to lower their interest rates. Personal loans are commonly utilized as debt consolidation loans with low-interest rates. As a result, you should never pass up an opportunity to lower interest rates on existing loans.
Things to Think About Before Getting a Debt Consolidation Loan:
- Make a list of all of your existing loans.
- Look for debts that are nearing the conclusion of their repayment period and exclude them.
- Examine any debts with pre-closure costs.
- Look for a debt consolidation loan from a lender.
- Compare debt consolidation loans and lenders and choose the best one.
- Calculate the difference between the entire prior EMI and the new EMI using math.
- Only do this if you can save a significant quantity of money.
How can you apply for a Debt Consolidation Loan?
You can get a debt consolidation loan from any bank or non-bank financial institution. However, in order to take advantage of it, you must first verify your existing debt and then assess your credit risk by monitoring your CIBIL score. Banks will be hesitant to lend if the borrower has a poor credit rating and a history of late payments because they are unwilling to accept the risk. Banks will only approve a debt consolidation loan if you can make regular payments on your previous loans.
Steps Include;
- Examine your credit report.
- Make a list of your debts and EMIs.
- Examine your loan choices.
- Fill out an application for a new loan.
- With the money from the new loan, you can pay off the old one.
- Take the prior lenders’ NOC certificate.
- Begin making payments on the new debt.
Debt consolidation loans are readily available and might help you alleviate financial stress. However, before you apply, you must perform certain calculations and determine the amount of money you will save. Also, keep in mind that having a strong CIBIL score and making on-time payments are the keys to getting loans approved at reduced interest rates.
Read Also: Home Loan Without Income Proof
