Personal Loan for Debt Consolidation: Know How they Work

Taking on big and small debts—home loans, car loans, credit card bills, and more—has become a part of everyday life. However, paying multiple lenders off each month can be a hassle. It can also be costly, particularly if some of your debts have high-interest rates. In such cases, debt consolidation can make debt repayment easier and cheaper.

What Is Debt Consolidation?

A debt consolidation loan combines several smaller loans into one. By personal loan for consolidating debt, the borrower has to pay only one monthly payment instead of many. It can simplify your finances and provide more favourable loan terms, such as a lower interest rate or EMI amount.

How Does Debt Consolidation Work?

1. It Lets You Pay Multiple Debts At Once

When consolidating debt, borrowers apply for personal loans online, balance transfer credit cards, or other consolidation tools from their banks or NBFCs. When a borrower consolidates their debt, the lender pays off the borrower's other debts on their behalf—or the borrower uses the cash to repay it. They will then continue to make a single monthly payment on the new loan.

2. It Simplifies Your Finances

With personal loan for debt consolidation, you only have one payment per month. Therefore, you don't have to worry about multiple due dates. This way, it helps budget monthly finances, so you know how much to set aside in advance.

3. It Makes Your Debts Affordable

Depending on your credit score, you can decrease your EMI by consolidating debts that save you money in the long run. Ensure you get the best personal loan interest rate by researching and using a personal loan interest rate calculator provided by the lender to get a loan estimate.

Moreover, by consolidating debt, your monthly payments can decrease as they will be spread out over a longer loan term.

4. It Lets You Pay Your Debt Sooner

Consolidation loans typically have lower interest rates than individual loans, so you may consider making additional monthly payments with the extra money. As a result, you can pay your debt earlier, saving even more money in the long run.

5. You Need To Sign A Debt Agreement

Debt agreements are contracts between a borrower and a lender. This contract determines how much money you can borrow. It also stipulates that you can use the consolidated loan to repay outstanding debts. Furthermore, this agreement obliges you to pay off the debt within a specified period. You may have to pay fines and penalties if you fail to repay the loan on time.

6. It Restricts You From Borrowing More During The Consolidation Process

When consolidating your debt, you must refrain from taking out any new loans. If you borrow more debt during the repayment process, you may end up in an endless debt cycle.

Is Debt Consolidation A Good Idea?

If you have several high-interest loans, it is a good idea to consolidate them. However, it may only be practical if your credit report has improved since you applied for the initial loans. Debt consolidation may not be worth it if your credit score doesn't allow you to qualify for a lower interest rate.

Avoid debt consolidation if you haven't dealt with the underlying problems that led to your current debt, such as overspending. Consolidating your debts is not an excuse to rack up more credit card debt.

Consolidate Your Debts With IIFL Finance Personal Loans

A personal loan from IIFL Finance can help you consolidate all your existing debt and pay a single EMI each month. Moreover, with IIFL Personal Loan Interest Rate Calculator, you can quickly calculate your EMI for a specific loan amount. Apply for a personal loan online now and get instant approval!

Frequently Asked Questions

Q1. What are the requirements for debt consolidation?
Ans. The requirements for debt consolidation include:
• Proof of income – Your lender needs to know that you can afford the loan.
• Credit history – The lender will check your credit report and payment history.
• Financial stability – Lenders want to be sure you can meet your financial obligations.
• Equity – Larger debt consolidation loans often require collateral such as home equity.

Q2. Do debt consolidation loans hurt your credit?
Ans. Consolidating your debt may help improve your credit score if you make on-time payments or reduce your credit card debt. However, if you rack up credit card debt again or miss a personal loan for debt consolidation loan payment, your credit score may fall.