Loans are no longer restricted to financing big-ticket purchases like home purchase or funding children’s education. An increasing number of customers are availing loans to meet their lifestyle expenses and fund small-ticket purchases like buying consumer durables. The increasing credit access also entices people, especially for those having poor credit scores, to take multiple loans at higher interest cost. The resultant higher EMI burden then leaves very little to spare for their emergency funds or crucial financial goals.
If you are in a similar situation, the best way to come out of it is to consolidate your multiple loans by availing a personal loan at a lower interest rate and for preferably longer tenure. Moreover, consolidating your multiple debts into a single loan will also save you from the hassle of tracking multiple EMIs, due dates, etc.
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Why take a personal loan for debt consolidation?
There are various ways in which borrowers can consolidate their debt like by availing a top up loan on their existing loan, availing loan against property, loan against securities, etc. Out of all these options, personal loan is the most popular instrument as it doesn’t require collateral. Additionally, personal loan has quick approval and disbursal process. Some lenders like Axis Bank and HDFC Bank also offer pre-qualified/ pre-approved loans with instant disbursal to select customers with good repayment capacity and credit history.
Existing personal loan borrowers incurring high interest cost can also try the personal loan balance transfer option to transfer their existing loan to another lender at lower interest rate and longer tenure. Some lenders also offer top up loans to those exercising personal loan balance transfer option. The borrowers can use the top up loan proceeds to pay off other costlier loans or meet various financial goals.
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Now that you know why personal loans are ideal for debt consolidation, here is how to go about it.
Step 1: Figure out the amount you need
To find out the amount you need, first find out your total outstanding debt and then, subtract from it the amount that you can arrange by redeeming your existing investments or by availing soft loans from your parents, friends, etc. Prefer low-yield investments like bank fixed deposits or debt funds for the purpose as their rate of returns are usually much lower than their loan rates.
Step 2: Check your credit report before applying for the new loan
Checking your credit report before applying for a new loan will allow you to know your current credit score, detect errors in your credit report and take corrective measures as needed. Credit bureaus allow customers to get their credit reports for free once in a year. However, if you want to keep a month-on-month track on your credit score from all credit bureaus that too for free, fetch your credit report from online lending marketplaces like Paisabazaar.com. Fetching credit reports from such online lending platforms will also help you get customised loan offers from their partner banks and NBFCs on the basis of your credit score. Moreover, comparing personal loans through such financial marketplaces does not adversely impact your credit score.
Step 3: Find the best personal loan offer
Once you know the loan amount, find out the best personal loan offer based on its interest rates, tenure, etc. Enquire for personal loan offers with those banks and NBFCs with which you have an existing deposit and/or loan accounts. Many lenders offer personal loans to their existing customers at lower interest rates. Then, compare the personal loan interest rates offered by as many lenders as possible. You can also check for the offer with other lenders. However, the best way to go about it is to visit online lending marketplaces like Paisabazaar.com. Such online lending platforms would allow you to compare personal loan options from multiple lenders based on your credit profile, without affecting your credit score.
Personal Loan Interest Rates Offered by Top Lenders
|HDFC Bank||11.00% onwards||Apply Now|
|ICICI Bank||10.75% onwards||Apply Now|
|Axis Bank||10.25% onwards||Apply Now|
|Kotak Mahindra Bank||10.99% onwards||Apply Now|
|IndusInd Bank||10.49% onwards||Apply Now|
|IDFC First Bank||10.49% - 25.00%||Apply Now|
|Bajaj Finserv||13.00% onwards||Apply Now|
|Tata Capital||10.99% onwards||Apply Now|
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Step 4: Prepay high-interest loans first
If you’re unable to consolidate your entire outstanding due, then you will need to prioritise your loans as per their interest cost. Those having outstanding dues on their credit cards as well as loans must pay off their credit cards first. This is because credit cards incur the higher interest rates (finance charges) usually ranging from 30% to 45% p.a., depending on the credit card issuer. Moreover, unpaid credit card balances also attract late payment fees if the minimum amount due mentioned in the credit card bill remains unpaid, thereby further piling up on your debt.
Step 5: Pay EMIs of the new loan by its due date
After paying off your older loans with the proceeds of the new loan, make regular repayment to avoid penalties and improve your credit score. Also, ensure to set standing instructions in your salary or other primary savings account so that the loan EMI gets deducted from your account automatically whenever the due date arises.