Debt Consolidation for Personal Loans: Important Points to Note

• cholamandalam
• August 5, 2023September 5, 2023
• 6

If you have multiple personal loans and credit cards with different lenders charging high interest rates, debt consolidation could be a good option to consider. Consolidating your debts allows you to take a new loan at a lower interest rate and use it to pay off all your existing high-interest loans. However, there are important points you need to be aware of before opting for debt consolidation.

Interest Rates

Make sure the interest rate on the new consolidation loan is significantly lower than what you are currently paying on other loans. Some lenders may offer low interest rates initially but it could rise later. Check if there are any penalties for prepayment if you want to close the loan early.

Loan Tenure

Most consolidation loans come with longer repayment periods of 3-5 years. While the EMI will be lower, you will end up paying higher total interest due to extension of the loan term. Calculate how much total interest you will pay with different loan tenures. Opt for the shortest possible tenure that fits your repayment capacity.

Fees and Charges

Enquire about the processing fees, foreclosure charges and prepayment penalties if any. These additional costs can reduce your interest savings from debt consolidation. Read the fine print carefully before signing up.

Credit Score Impact

Your credit report will be pulled for a hard inquiry when applying for a new loan. Multiple inquiries may lower your credit score temporarily. Repaying the new loan on time is important to rebuild your creditworthiness over the long run.

Budget and Expenses

Make a detailed budget to ensure your current income can support the EMIs on the new consolidated loan. Cut unnecessary expenses to free up funds for timely repayments. Any late payments can negate the benefits of debt consolidation.

Alternative Options

Consider debt management plans offered by credit counselling agencies or negotiating directly with lenders for lower interest rates or waived fees/charges before opting for a consolidated loan.

In summary, debt consolidation can simplify repayment of multiple loans but only makes sense if you get a substantially lower interest rate and have the discipline to stick to a budget. Do proper research to maximize long term savings. With responsible financial planning, it can help eliminate high-cost debt faster.