The Pros And Cons Of Using A Personal Loan To Consolidate Debt

Debt consolidation means combining two or more debts into a single debt. This streamlines your finances and helps you pay multiple loans with a single monthly EMI. You can combine all different kinds of loans into one by taking a personal loan. It may become cheaper for you to consolidate the loans. This is possible because the rate of interest of the consolidated debt may be lower than the combined rate of interest for all the individual loans you owned.

Ways To Consolidate Debt

There are three ways to consolidate debts. These are:

• Personal Loans –

Personal loans are available with banks and other financial institutions. They provide loan for tenure of 3-5 years. The rate of interest depends on your credit score and other financial details. It is an unsecured loan whose purpose is not predefined. So it can be used to pay off existing loans.

• Balance Transfer Credit Cards –

Creditors determine the amount of balance that can be transferred to these cards on the basis of your credit history and credit policies. These cards often have a promotional rate for a limited time in which you do not have to pay any interest. The rate of interest charged once the promotional rate expires may be considerably high.

• Home Equity Loans –

A homeowner can use the house as collateral to avail a house equity loan against it. This loan can be used to consolidate debts. The rate of interest is generally lower in home equity loans than the personal loans.

Debt Consolidation

Debt consolidation is a three step process.

• Avail a new loan
• Use the new loan to pay off the previous loans
• Repay the new loan

Depending on the terms of the new loan, you may end up paying your debts sooner with a lower monthly EMI. It increases your credit score and improves your financial report.

Pros Of Using Personal Loans To Consolidate Debts

• Streamline Your Finances

You may end up paying off your loan faster than you would have with individual loans. Also, the chances of missing an EMI for a loan in case of multiple loans will be negated. This will help improve for credit report. Also, when you are credit free, you can use the money sooner to chase your other financial goals.

• Lower The Rate Of Interest

The rate of interest may be lower than the rates of all the loans combined. This would end up you paying lower interest amount on the loans. This would further reduce the monthly repayment amount.

• Improve Credit Score

Since you would not miss an EMI of the new loan and may repay the loan sooner, your credit history will improve. New personal loan can reduce your credit utilization ratio leading to a good credit score.

• Fixed Repayment Plan

If you use a personal loan to repay and consolidate your debts, you will know exactly the tenure and monthly amount to be paid.

Cons Of Using Personal Loans To Consolidate Debts

• You May Pay A Higher Rate Of Interest

The new loan will be available to you depending on your current score and credit history. If your current credit score and history are not good then you will not get a competitive rate of interest which is lower than the rate of interest of existing loans.

• May Come With Added Costs

You may end up paying additional costs like origination costs, balance transfer fees, closing costs and annual fees.

• You May Pay More Interest Over The Tenure Of The Loan

The tenure of the new loan will start from the day it is disbursed. Even though the interest rate may be lower but paying it for a longer period of time will make you pay interest amount higher than what it was before consolidation.

• Bad Impact On Your Credit Score

Missing or delaying an EMI of the new personal loan will hugely impact the credit score. It may also cost you additional fees.

• May Not Solve Underlying Financial Issues

Generally the borrowers, who consolidate their debts, do not overcome their underlying habit of financial issues that led to many debts in the first place. This leads to continued building of debts.

• May Encourage Increased Spending

Paying off debts with credit cards and other credit instruments may create an illusion to the borrower of having excess money than he actually possesses.

Reasons To Consolidate Debt

You might like to consolidate your debts if

• You prefer fixed payments
• You have a good credit score and credit history
• You want one monthly payment
• You can afford to repay the new loan

Steps For Debt Consolidation

• Check your credit score and credit history
• Determine the loan amount
• Research about different lenders and rate of interest they are offering
• Get yourself prequalified for the loan
• Apply for the loan with the lender who gives you the best deal
• Receive funds

Conclusion

Debt consolidation can help you repay your multiple loans easily and in a streamlined manner. It may improve your credit score and have lower rate of interest. You may be charged with additional fees for doing so.

IIFL Finance provides comprehensive and customised personal loans, which you can use to consolidate your debt. You can also use the personal loan calculator to determine your repayment obligations when consolidating your debt into a single loan.

The debt consolidation personal loan offers instant funds up to Rs 5 lakh with a easy disbursal process. You can apply for the loan online or offline by visiting IIFL Finance nearest branch and verifying your KYC details. The loan terms are flexible and come with nominal interest rates to mitigate the chance of a financial burden based on repayment.