Debt consolidation is one of the best-kept secrets in personal finance. It is a lifesaver if you have a lot of debt. Instead of spending most of your income just paying off the interest component on your loans, debt consolidation by obtaining a personal loan is somewhat of a hack. That said, it’s a tricky thing to do, and you should do your research before trying it out, or you could just make things worse.
Debt consolidation is the process of taking a new loan to pay off multiple different loans and credit balances. It involves taking on a new credit facility — often an unsecured loan — and using those funds to settle various other liabilities that you may have, such as a high-interest loan, a couple of high credit card balances, and so on.
By consolidating multiple high-interest debts into a single, often low-interest loan, you get the advantage of easier debt repayment and reduced overall financial burden.
Understandably, it can be confusing to think that a new liability can help the overall burden of your debt. But when you plan it right, availing of a personal loan for debt consolidation can be an extremely savvy financial move.
A personal loan is an unsecured loan with slightly higher interest than other types of loans (like home loans and education loans).
When you take out a personal loan from a bank or an NBFC (Non-Banking Financial Company), you can typically use the funds for any personal use - like an emergency home repair or an upskilling course.
But this article is about debt consolidation, so let’s see how to use a personal loan for this purpose.
In essence, you can take a personal loan at an interest rate that works for you, and use that money to pay off your other debts. After that, you’ll only have to pay of the personal loan, which will be relatively easier to pay off compared to your other debt.
Keeping track of multiple EMI payments can be a hassle. It also increases the chances of missing a payment, which could, in turn, lead to steep penalties and additional interest. This will also negatively affect your credit score and make you less likely to get other loans.
When you take a personal loan, you need to only make a single EMI payment each month instead of multiple payments.
More affordable interest rates:
Some liabilities like credit card debt can be extremely expensive. You might want to check out this article about paying off credit card dues.
Here is where personal loans can help. They typically come with lower interest rates compared to what you may be currently paying on your other debts.
Easier financial planning:
One personal loan in place of different debts can also make financial planning easier. Personal loans typically have fixed repayment terms ranging from 1 year to 5 years. Before you take the loan, you can draw up a financial plan to ensure that you can repay the loan fully during the tenure of your choice and then borrow the funds accordingly. The fixed repayment schedule facilitates better financial planning and ensures that you can repay the loan without any new defaults.
Personal loans are a clever way to pay off your other debts, especially if they’re at varying interest rates and have different EMI payment schedules. Look for a personal loan that comes at a lower interest rate than your other debts. Or simply, work out what’s the cumulative interest amount you are paying on your other debts, and if the personal loan interest amount is less than the rest of the put together. Be careful not to take personal loans from lenders not approved by the RBI.
Loans are instant on Fi Money, this process is 100% paperless, and the loans are provided at competitive interest rates — where each user remains in control with complete visibility of all details. Plus, you can avoid EMI late fees by setting up automatic in-app payments. Our RBI-licensed partner bank assigns an eligible loan amount to each user (up to ₹5 lakh).
Yes, a personal loan is a good idea for debt consolidation, especially if the overall interest rate that it comes with is lower than the interest rates on your existing debts. It consolidates all your debt into a single EMI each month, and if that EMI is within your repayment capacity, you can get out of your debt trap sooner rather than later.
If you are planning to avail of a personal loan for debt consolidation, you need to be aware of the eligibility criteria first. Different banks have different criteria pertaining to age, residency, income, and credit scores. Check the criteria set by your preferred lenders and apply for the loans that you qualify for. This will improve the chances of your personal loan application being approved.
Yes, debt consolidation is an excellent way to eliminate debt over the long term, since it consolidates all high-interest debt into a single and often more affordable liability. That said, debt consolidation does not immediately eliminate all debt in your portfolio. It merely replaces costly debts with low-interest ones.