If you are financially burdened and are going through a stressful phase in life with multiple loans overwhelming you, then go for a debt consolidation loan. The idea is to take one loan against multiple loans you may have taken for various purposes like buying a car, some consumer durables or maybe even a house. Not to forget the outstanding you are paying on your credit cards.
- Why does a Person Take a Loan?
A person can take a loan for a variety of reasons at different points in his life. Some people take them one at a time, others take a couple or more simultaneously.
- Buy a house or any fixed asset.
- Purchase a car or a motorcycle.
- Buy consumer durables.
- Pay credit card bills.
- What Happens if You Opt for Debt Consolidation Loan?
If you take a debt consolidation loan, you are paying off all your loans by taking one big loan. This way you are not dealing with multiple lenders. Instead, you are paying only one EMI to a single bank or a financial institution.
- Reduce the number of EMIs.
- Pay only one EMI.
- Deal with only one lender.
- Money against loans is debited only once a month and not multiple times.
- Advantages of Debt Consolidation Loan
There are many advantages of opting for a single loan against multiple loans. Take one big loan and write off your multiple debts. It is very beneficial for those people who are burdened with paying EMIs multiple times in a month to different lenders. Juggling many payments can be very stressful and may also be very expensive since the interest charged by different lenders varies.
- Clear all credit card dues.
- Save on interest.
- Improve your credit score which will help in acquiring a new loan in the future if required.
- If repaid with discipline, it can make you debt-free sooner than you thought.
- Disadvantages of Debt Consolidation Loan
While the rate of interest and outgoing per month may reduce when you take a debt consolidation loan, remember the savings in your pocket may not be as attractive as you think. This is largely due to the fact that your prepayment timeline increases. Similarly, by availing a big loan the total credit available also reduces. So when you go for a new loan your eligibility comes down. Also, note that many debt consolidation loans demand high monthly and additional processing fees.
- Overall outgoing may increase on account of the increased loan tenure.
- Credit eligibility reduces. This will be a huge disadvantage when you require a new loan.
- Lenders charge a processing fee or additional charges, something the borrower would have already paid while taking all the previous loans.
- Types of Debt Consolidation Loans
There are numerous types of debt consolidation loans. These vary from taking a new credit card to pay off outstanding on other credit cards to even taking a loan against the value of your house.
- Balance transfer on credit cards
- Personal loan
- Home equity loan
- Conditions to Avail a Debt Consolidation Loan
It is not if you have multiple loans you can walk into any bank or go to any lender and expect a breeze while trying to take a debt consolidation loan. There are some conditions that you must fulfill to be eligible for such a loan. Most important is your credit history. Non-payment of a single EMI is a blot on your creditworthiness and reduces your chances of taking a fresh loan. Apart from the credit history, lenders look at the current financial situation. Employment with a salary good enough to be in a position to repay the new loan is an important condition the lender looks for.
- Credit history
- Current financial situation
In conclusion, a debt consolidation loan is a good idea if you are stressed with paying multiple lenders. It helps you streamline your finances. However, this is like any other loan and its irregular or non-payment has a negative impact on your credit history.