Struggling with Multiple Debts? Consolidate Them With a Personal Loan

Due to increased loan accessibility, household income and lifestyle aspirations, many people find themselves trapped in a debt cycle where rising interest and mounting EMIs slowly drain their savings and also peace of mind. If you’re feeling stressed every time a payment reminder flashes on your phone, debt consolidation could offer the relief you need.

What is Debt Consolidation?

Debt consolidation is an act of merging all your high-interest outstanding loans and credit card balances into a single manageable loan, ideally availed at a lower interest rate and longer tenure. Combining your outstanding dues into a single loan gives you benefits like:

• Higher savings on the interest cost: By consolidating high-interest debts with a lower interest rate loan, you can reduce the overall interest cost.
• Improved credit utilisation ratio: Paying off credit card dues with a single loan will improve your credit utilisation ratio, i.e., the percentage of your total available credit limit that is currently in use.
• Reduced EMI burden: Lower interest rate and single loan payment reduces EMI burden, leaving you with higher disposable income.
• Simplified payments: Instead of making separate payments to different lenders or credit card companies, you avail a single loan large enough to repay all those liabilities. Then, you’re left with just one EMI to pay every month.

How Do I Consolidate My Debts?

Step 1: Determine how much you need to borrow

To figure out how much loan you need, start with finding out your total outstanding debt. Once you have a number, subtract from it the amount you can arrange – either by redeeming your existing investments or by borrowing from your friends, family, etc. (also known as soft loans).

Tip: For reducing your debt, redeem only low-yield investments like bank FDs or debt funds as their rate of returns is usually much lower than the loan interest rates.

Step 2: Review your credit report before applying for a loan

Before applying for a new loan, always check your credit report. By doing so, you will know your current credit score. It will also help in identifying errors in your credit report and take corrective measures as needed.

Remember:

• Credit bureaus allow customers to get their credit reports for free once in a year. Those wanting to track their credit scores monthly from all credit bureaus for free can check it from online financial marketplaces like Paisabazaar.
• Checking credit scores from such online financial marketplaces will also help you in getting customised loan offers from their wide range of partner banks and NBFCs. Moreover, comparing loan offers through such online platforms will not affect your credit score.

Step 3: Determine which loan option would be the best for consolidating your debt

Deciding which loan would be the best for consolidating your debts would depend on a several factors including, your current financial standing, credit profile and the loans you’re currently servicing. While there are multiple loan options available for consolidating your debt (such as loan against property, loan against securities and top up loan on an existing loan), personal loan is among the most preferred options for many consumers.

Here’s why:

• You don’t need to pledge any collateral or security to avail the loan.
• It has a faster approval and disbursal process as compared to most secured loan options.
• In case of pre-approved offers, the loan can be disbursed on the same day. Some lenders even claim to disburse the loan within a few minutes.
• The absence of collateral also reduces the list of documents required to avail the loan. In case of pre-approved offers, the documents might not even be needed.

Step 4: Find the best personal loan offer

After determining the loan amount and the kind of loan you need to apply for, find out the best personal loan offer. For this,

• First contact those banks and NBFCs with which you have an existing deposit and/or loan accounts. This is because many lenders offer personal loans to their existing customers at lower interest rates.
• Compare the personal loan interest rates offered by as many lenders as possible.
• When comparing offers, don’t just look at the interest rates. Compare other loan features too such as loan amount, tenure, processing fees, disbursal time and prepayment charges.

Best Practice: While you can enquire about personal loans directly with each bank and NBFC; however, we would advise you to save on your time and efforts by visiting online financial marketplaces like Paisabazaar. Such online financial marketplaces allow their users to compare personal loan options from multiple lenders based on their credit profile, without adversely affecting their credit scores.

Will Consolidating Debts Hurt My Credit Score?

Applying for a new loan for debt consolidation might slightly and temporarily reduce your credit score due to hard enquiry. However, the overall effect on your credit score could be positive, provided you handle your EMI payments of your new loan responsibly. Credit cardholders having overdue credit card bills can also use debt consolidation strategy to pay off their outstanding balances and reduce their credit utilisation ratio and improve their credit scores.

Things to Consider

While debt consolidation has its advantages, it is not a magic fix. Here’s what you need to watch out for:

• Not addressing the root cause of debt: If overspending led to multiple debts, consolidating without changing your habits will only delay the problem.
• Temptation to reuse credit lines: Once existing credit card dues are paid off using the personal loan, it can be tempting to use those cards again, leading to a worse financial situation.

Conclusion

Debt consolidation might sound like a temporary fix, however, when planned and executed smartly, it can reduce the cost of borrowing, financial stress and provide a clear path to becoming debt-free. But getting out of debts also requires financial discipline and commitment.