Debt consolidation could help you lower the EMI that you collectively pay for different existing loans. Here are a few things to consider before opting for debt consolidation.
Debt is an important part of managing your personal finance as it works as a leveraging tool to increase your financial capacity. However, there are many events for which you may need a bank loan and it could result in multiple loans piling up over a period of time. It could be a difficult task to handle many loans at a time and may impact your Credit Score negatively in the long term. One way which could prove beneficial in managing multiple loans is debt consolidation.
In this article, we discuss what consolidating your loans means and what should keep in mind while opting this way.
Repercussions Of Having Multiple Loans
Handling too many loan instruments together increases the possibility of missing the repayment of one or more debt instrument. This could have a negative impact on your Credit Score. Irrespective of whether you have defaulted in making payment for a Home Loan or a Credit Card, a default is seen as a black spot.
It also becomes difficult to prioritise loans and makes it difficult to decide which loan should be closed first and which one you should carry for a longer period. As it’s almost impossible to assess the impact of the change in the interest rates, it’s always better to keep the number of debt instruments to a manageable level. Thus, debt consolidation is a very good way to reduce the number of loans by combining all the existing debts into one and focus on a single loan repayment.
How Does Debt Consolidation Work?
One way to execute debt consolidation is to convert all your secured and unsecured debts into a single secured loan such as a loan against property (LAP), loan against securities, loan against FD or LIC policy. Such consolidated secured loans have normally very low-interest rate and you also get a longer tenure to repay the secured loan.
Another way to consolidate all your loans is by taking an unsecured loan such as a Personal Loan. But remember that unsecured loans generally have high interest rates. Moreover, considering that you already have several existing loans, in such situations it could be a difficult task for you to get a big unsecured loan.
When you apply for a debt consolidation loan, a bank or financial institute will first assess your existing loan history and CIBIL score. Banks would check whether you are financially capable to service the consolidated EMIs or not and it may thereafter advise you to go for a secured loan or an unsecured loan. If you do manage to secure the loan after these checks, make sure you use the amount to pay off all your pending loans, so that you can focus on one single EMI.
How To Prepare For Debt Consolidation?
Before you apply for a debt consolidation loan, you need to prepare yourself for it. Here are some essentials you need to follow:
- Make a list of all your existing loans
- Check the penalty that you may need to pay for closing an existing loan
- Now let’s see how to analyse the amount that you may save or need to pay extra due to debt consolidation with the help of an example as given in the table below:
| Debt consolidation analysis | |||||
| Loan Detail | Amount | Interest | Remaining tenure | EMI | Amount to be paid till end |
| Loan A | 100000 | 10% | 3 | 3227 | 116162 |
| Loan B | 150000 | 15% | 3 | 5200 | 187193 |
| Loan C | 200000 | 14% | 3 | 6836 | 246079 |
| Loan D | 500000 | 10% | 3 | 16134 | 580809 |
| Loan E | 600000 | 9% | 3 | 19080 | 686874 |
| Total | 1550000 | 50477 | 1817117 | ||
| CASE-I-Consolidate loan@10% | 1550000 | 10% | 3 | 50014 | 1800509 |
| CASE-II- Consolidate loan@11% | 1550000 | 11% | 3 | 50745 | 1826820 |
| *Remaining tenure is assumed to be same | |||||
- After consolidating all the loans, if you do not need to pay a significant extra amount in comparison to the amount you need to pay under multiple loans, then you should go ahead with the consolidation option
Benefits of Debt Consolidation
There are many benefits of debt consolidation. Firstly, you get the chance of lowering the EMI that you collectively pay for different existing loans. Secondly, by consolidating loans, you can lower the interest rate under a single new loan and hence save a lot of money. It can also help to keep your credit score in good shape. Most importantly, stay stress-free from managing too many loans. Already the interest rate on loans are very low in the prevailing market situation which can help you to consolidate all your loans into one and reduce the interest load.
Note: Please consult a financial expert before deciding if a loan consolidation will help you in fetching a good deal.
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