Debt Consolidation is a key strategy of debt management that allows you to pay off long-standing debts that are eating into your finances. This measure helps you to save a considerable amount in terms of interest dues and other charges.

What is Debt Consolidation? 

Debt Consolidation is the process of consolidating all of your existing debts into a single loan. Debt consolidation offers a cheaper interest rate, more flexible repayment options, and other advantages.

Debt consolidation combines multiple high-interest loans like credit card bills into a single lower-interest loan. It effectively reduces your monthly bill payments, resulting in a significant reduction in your monthly financial burden.

You no longer have to pay multiple debt payments each month, such as credit card bills and loan EMIs; instead, you only have to pay one loan payment each month. You are less likely to be late or miss payments because there is only one monthly loan payment.

Debt Consolidation Pros & Cons

PROS

CONS

Get a lower interest rate on your new loan

You may have to bear a considerable amount of processing fees

Better debt management by consolidating all of your debts into one

You may not get a lower interest rate if your credit score is not good

You can come with a better repayment strategy

It has no effect if you don’t change your spending habits

 

Additional Reading : The Pros and Cons of Credit Card Debt Consolidation

Key Benefits Of Debt Consolidation

1. Helps you simplify your repayments

One of the most important advantages of debt consolidation is that it simplifies your repayments. You can stop making several payments when you consolidate various debts into one. You only have to pay once a month. This significantly minimizes the number of occurrences of late or missed payments.

Debt consolidation allows you to combine numerous monthly payments into a single payment, making it easier to keep track of your debt repayment progress and bills so you don't miss a payment and risk damaging your credit score. You'll also have a better notion of when all of your debt will be paid off if you're aiming toward a debt-free lifestyle.

2. Fetches You Lower Interest Rates

Some of your unsecured debts – like credit cards and personal loans – could be charging you a high-interest rate that can add significantly to the debt you have to pay each month. By combining multiple debts into one, you pay lower interest in the long run, especially if you can get a debt consolidation loan at low interest. 

Even if you have largely low-interest loans, you may be able to lower your overall interest rate by combining debts if your credit score has improved while applying for other loans. Especially if you don't consolidate with a long loan term, this can save you money throughout the life of the loan. The best advice is to shop around and look for lenders who offer a prequalification process to ensure you get the best deal available.

3. Improve your Credit Score

New loans may cause a short drop in your credit score due to the hard inquiry, however, debt consolidation can help you boost your credit score in a variety of ways. Paying off revolving lines of credit, such as credit cards, can, for example, lower the credit usage rate on your credit report.

Consolidating your debts can also help you enhance your credit score. As a result, your chances of getting a loan in the future will be greatly increased. You can also streamline your bill-paying schedule by enrolling in debt consolidation loan services.

4. You can pay off your debt faster

Consolidating your debt will allow you to pay off your debt far more quickly than you had anticipated. Consider making extra payments with the money you save each month if your debt consolidation loan has a lower interest rate than your individual debts. This will allow you to pay off the loan sooner, saving you even more money in the long run on interest.

5. Less Stress

With lesser repayments to worry about, there is less stress with your finances. Consolidating all your debts into one single debt makes it easier to manage and repay them comfortably. By having a single debt, you will have lower fees and charges related to loans. It also assists you in consolidating all of your previous payment schedules and amounts into a single, consistent payment.

Additional Reading : 7 Must Know Debt Consolidation Facts

When Should You Consider Debt Consolidation?

Debt consolidation, as mentioned before, is a very good strategy to pay off your debts faster. But how do you decide when to go for debt consolidation? Here are a few simple tips to help you with that. 

  1. The debt is very large – If your debt has become very huge and you are finding it hard to manage, you should consider debt consolidation. The lower interest rate will reduce your overall cash outflow and help you pay off the debt sooner. 
  2. You desperately want to improve your finances – When you are less stressed about your debts, you are able to plan your finances better. You might even be able to invest some of the money and make some returns. 
  3. Your credit score is in bad shape – High debts can affect your credit scores. So debt consolidation might be a good idea if you are looking to improve your credit score. A good credit score is necessary if you are looking to get a new loan. A good credit score is important to get lower interest rates and good loan terms. 
  4. If your debts are affecting your monthly cash flow – If you have accumulated a huge debt and it is affecting your monthly cash flow, it is high time that you strategize to pay off your dues. Debt consolidation is a good way to pay off your loans quicker. 

Suggested Reading: Debt Consolidation or Balance Transfer: Which to choose? 

Conclusion

Consolidating your debts is an excellent way to get out of debt. This is a well-structured procedure that necessitates the assistance of a professional. Before implementing a debt consolidation strategy, you should call your lender and explore all of your choices. 

You might find it easier to comprehend exactly how much you owe and how long it will take to pay it off if all of your former repayments and fees are combined into a single loan with a definite end date. If you're considering taking out an unsecured personal loan to pay off debt, keep in mind that shorter loan terms mean higher monthly payments but less interest altogether.

FAQs: 

  1. What are the best debt consolidation loans in India?
  • SBI Xpress Credit Personal Loan
  • Bajaj Finserv Debt Consolidation Loan
  • Citibank Personal Loan
  • Axis Bank Personal Loan
  • ICICI Bank Personal Loan
  • HDFC Bank Personal Loan
  1. Does debt consolidation promise a lower interest rate?

Debt consolidation helps you lower your interest rate. However, the final interest rate will depend on your current debt and the lender’s loan policy. Check with your lender and negotiate with them before you go for debt consolidation.

  1. What is the impact of debt consolidation on my credit score?

Debt consolidation can help you save money on your monthly payments while also improving your credit score. The secret to successful debt consolidation, on the other hand, is to stay within a budget while paying down your debt.

  1. Who can take a debt consolidation loan?

The act of taking out a new loan to pay off all old obligations is known as debt consolidation. Debt consolidation loans are frequently used by those who have many unsecured loans and are having difficulty keeping track of their EMIs and repayments.

  1. Are there any eligibility criteria to get a debt consolidation loan?

There is no separate eligibility to get debt consolidation. This solely depends on the discretion of the lender.