Many individuals would concur with the assertion that personal loans can be a godsend in a variety of sticky situations. On the other hand, it is not necessary for you to visit numerous bank branches in order to apply for loans at each one.
As a result of the success that digital lending has had in the market, we have entered the era of applying for and receiving small loans online. A reliable loan application is now available for any customer in India to check out and download.
The entirety of the process of applying for a loan is very straightforward; the customer just needs to select the desired amount and check their eligibility online. The subsequent action is to upload a few different types of documents.
Debt is inevitable and can rapidly lead to high interest rates and difficult-to-manage monthly payments on credit cards and loans, regardless of the purpose. Although this is sometimes inevitable, how you choose to manage your debt is what matters.
By combining all of your debts into a single monthly payment, debt consolidation is one strategy that can make managing your debt much simpler. It typically comes with a lower interest rate than what you were paying each month previously, in addition to boosting your credit score.
A personal loan, transferring multiple credit card balances to a single credit card, using a home equity loan, or even a 401(k) loan are all effective ways to consolidate debt.
Traditional personal loans have a longer application and approval process, but digital loans can be processed and approved much more quickly, and they require significantly less paperwork. It is probably the most significant advantage of applying for loans online. Personal loans are taken out for a wide variety of reasons, including but not limited to the following: meeting medical emergencies or other unexpected expenses, home renovations, travel costs, consumer appliance purchases, holidays, weddings, higher education, and many other reasons.
In this scenario, were you aware that you can use a personal loan to simplify and consolidate all of your unsecured debts into a single payment? Continue reading to find out more.
Benefits of debt consolidation
1. Consolidate multiple payments into one.
Debt consolidation simplifies the process of paying off debt and can even result in lower monthly payments due to an extended payoff period. If you have multiple credit card balances like the majority of people, consolidating them into a single source will feel like a weight has been removed off your shoulders. Your debt still exists and has not been miraculously reduced, but with multiple payment deadlines eliminated, you can now concentrate on a single debt source.
2. Reduce Interest Rates
Most unsecured debt, particularly credit card debt, carries high interest rates that can significantly increase your monthly payments. If you have good to excellent credit, paying off multiple high-interest debt accounts and consolidating them into one will save you money in the long run by securing a reduced interest rate on your new single account.
When it comes to finances, credit score is crucial and is a major determinant of the interest rate you can anticipate to obtain when consolidating debt. Comparatively, the average interest rate for those with excellent credit (720-850) can range from 4 to 20%, whereas those with poor credit (300-639) may wind up paying between 15 and 36% on their consolidated debt.
Regardless of the credit score bracket you fall into, the likelihood is that the interest rate will be lower than what you are currently paying.
3. Can Enhance Your Credit Rating
Regarding credit scores, a further advantage of debt consolidation is that it can enhance your credit score. Since you’ll be reducing your credit utilisation rate by consolidating with a personal loan, it’s likely that your credit score will increase within a few months, as a result of the decrease in your credit utilisation rate. (also known as credit utilization ratio).
This number is calculated by dividing your current debt by your credit limit. If you have a balance of $2,500 on one of two credit cards with a total available credit of $5,000, your credit utilisation rate is 50%, as you are using half of the total available credit. Credit utilisation is a major factor in determining your overall credit score.
Keep in mind, however, that it’s normal to experience a small, temporary decrease in your credit score whenever you apply for new credit. However, the long-term improvements to your credit score and the interest savings you’ll realise by consolidating your debt make it a financially sensible decision.
4. Less Stress
Consolidating your debt into a single, more manageable payment will significantly reduce your tension and help clear up the mess that multiple payments can create. Money issues such as debt are known to cause tension, but this does not have to be the case. By taking charge of your finances and allowing yourself to maintain a single monthly debt payment, you will gain mental clarity and be in a better financial position.
5. Pay off debt faster
It is not uncommon for credit card balances to remain unpaid for several years. Credit card companies earn interest on what you owe, so lenders don’t care if it takes you five or twenty years to repay your debt. A benefit of debt consolidation is that the consolidation process takes multiple factors into account when determining the duration of the loan, such as income, credit score, and the amount owed, in order to devise a practical repayment schedule. For this reason, the repayment period for debt consolidation loans is shorter.
How consolidation of debt works
The consolidation of multiple debts into a single, larger obligation is debt consolidation. Consumers frequently take this action when they have a substantial amount of high-interest debt.
Katie Ross, executive vice president of the nonprofit American Consumer Credit Counseling, explains, “It’s frequently used to consolidate credit card debts, auto loans, student loans, medical debt, and other types of loans into a new loan.” The borrower will then only be required to make a single monthly payment instead of distinct payments for each debt.
In addition to streamlining your finances, debt consolidation should provide you with more favourable loan terms, such as a lower interest rate.
You can also take advantage of EMI plans, which are much simpler to manage than the process of repaying multiple and accumulating credit card dues. These plans are both affordable and convenient.
How to determine if you should consolidate your debt
The answer to this query depends on the specifics of your situation. Having said that, here are some scenarios in which you may be a suitable candidate:
- You have an excellent credit rating: If you have a high credit score — at least 670 — you will have a greater chance of securing a lower interest rate on future debt, which could save you money.
- You prefer fixed payments: If you prefer a fixed interest rate, repayment term, and monthly payment, a debt consolidation loan could be the correct choice for you.
- You desire a single monthly payment: Additionally, if you dislike keeping track of multiple installments, a debt consolidation loan might be a good idea.
- You have the ability to repay the loan: You will only benefit from a debt consolidation loan if you can afford to repay it. If you cannot, you risk excavating a deeper financial hole.
How to obtain a loan for debt consolidation
If you believe a debt consolidation loan is your best option, follow these measures to obtain one:
- Examine your credit score and credit reports. Determine if you satisfy the lender’s minimum credit score requirement by viewing your credit score. Additionally, obtain a free copy of your credit report at AnnualCreditReport.com and review it for errors. If you discover any, promptly file disputes with the relevant credit bureaus. A bureau may take up to 30 days to respond.
- Determine the quantity of the loan. Determine how much money you need to borrow by summing the debts you wish to consolidate. Also consider possible origination fees, which are deducted from the loan amount.
Research different lenders. Examine the websites of various online lenders to determine their eligibility requirements, loan terms, and associated fees. Also, contact your local bank or credit union to determine if they offer debt consolidation loans.
- Obtain qualification. When you apply for prequalification, each lender will estimate your loan’s rate and terms. Typically, a lender will conduct a mild credit check for prequalification, which will not affect your credit score.
- Apply. Depending on the lender you choose, you will submit an application for a debt consolidation loan online, in person, or over the phone. You will be required to provide personal information including your name, date of birth, and income.
- Acquire funds. If you are authorized, your lender may deposit the funds into your account within one business day. Utilize the funds to settle your existing debts. Repay the debt consolidation loan in accordance with its terms to protect your credit rating.
As with any other financial decision, you’ll need to carefully evaluate your own circumstances to determine if debt consolidation is the best course of action for you. However, debt consolidation offers significant benefits that make it a worthwhile option to consider.
It will consolidate your debts into one simple monthly payment with a lower interest rate, improve your credit score, and enable you to focus on other, more pressing matters.