What are Debt Consolidation Loans – Eligibility, And How To Apply Online
If you have multiple loans, taking out a single loan to pay them off is known as a debt consolidation loan. This repayment solution provides you the option to merge multiple loans under a single loan. Meaning, you will have a single EMI to pay every month.
Read on to understand how a debt consolidation loan works, its benefits, how to apply for a debt consolidation loan, interest rates, documentation and more.
What is a Debt Consolidation Loan?
Debt consolidation is the procedure of repaying multiple loans with a new loan. The process involves utilising the proceeds of the new loan to pay off every individual loan at once. You can opt for a specialised debt consolidation loan for paying off your loans or you can also apply for a standard personal loan to consolidate your loans.
Debt consolidation may be a good idea if you can get a loan with a lower interest rate. For example, if you have an Rs.1,00,000 and Rs.2,00,000 loan which has a combined monthly payment of Rs.11,000, you can opt for a single Rs.3,00,000 loan which has a monthly payment of Rs.6,000. This is known as debt consolidation.
Before you opt for a debt consolidation loan, check whether you have the capacity to pay it off. Although it helps to pay off multiple loans at once, it is still a loan by itself. You will be required to make EMI payments on the basis of a new interest rate and repayment tenure.
How do Debt Consolidation Loans Work?
When a borrower wants to consolidate debt, they go to their bank or another lender and apply for a personal loan, a balance transfer credit card, or another debt consolidation option. The lender may pay down the borrower’s other bills immediately in the case of a debt consolidation loan, or the borrower may take the cash and pay off his or her remaining balances. Many balance transfer credit cards, likewise, have a recommended method of combining a cardholder’s existing cards.
Once the borrower’s pre-existing debts have been paid off with the new loan funds, the borrower will only have to make one monthly payment on the new loan. While debt consolidation might reduce a borrower’s monthly payment, it does so by extending the loan length of the aggregated loans. Consolidating loans also simplifies payments and makes financial management easier—especially for borrowers who have trouble managing their finances.
Assume you have four credit cards outstanding, each with the following balances:
- 25,000 rupees on credit card A
- 30,000 rupees on credit card B
- 40,000 rupees on credit card C
- 25,000 rupees on credit card D
In this scenario, you have a total credit card debt of INR 1,20,000 spread across four cards, with annual percentage rates (APRs) ranging from 16% to 25%. If your credit score has improved since you applied for your current cards, you may be eligible for a balance transfer card with a 0% introductory annual percentage rate (APR) that allows you to pay off your existing cards interest-free for a defined amount of time. Alternatively, you may take out a debt consolidation loan with an APR of 8%, which is lower than your present rates but not 0%.
Also Read: What is a consolidated account statement: Benefits, steps to generate
Features and Benefits of Debt Consolidation Loans
Debt consolidation loans provide several benefits:
- Finances are Streamlined
The number of payments and rate of interest you deal with is reduced when multiple loans are combined into a single loan. Consolidation helps you improve your credit by lowering your chances of missing or paying late payments. If you’re striving for a debt-free lifestyle, you’ll also have a better idea of when all of your debt will be paid off. - It is Possible to Repay the Loan Sooner
If the interest rate of a debt consolidation loan is lower than your debt, consider making extra payments with the money you save each month. It will help you to repay the loan sooner, saving you even more money in interest over time. Keep in mind that debt consolidation frequently means lengthier loan terms, so you’ll have to pay off your debt earlier to reap the benefits. - Reduced Interest Rates
Let’s say your credit score has improved while applying for other loans – you may be able to reduce your overall interest rate by consolidating obligations. Significantly, if you don’t combine it with a long-term loan, you can save money throughout the loan’s life. To guarantee you obtain the best deal, shop around for lenders that provide a personal loan prequalification process.
How to Apply For Debt Consolidation Loans
You can get a debt consolidation loan from various lenders in India. The application process is simple and requires the usual documents like any other loan. Here’s how you can apply for a debt consolidation loan.
- Step 1: Check eligibility
- Step 2: Select the loan amount
- Step 3: Upload required documents
- Step 4: Apply
Upon verification, the lender will approve your application and the loan will be disbursed into your account within 3-4 days.
Eligibility Criteria For Debt Consolidation Loans
| Age | 23 – 65 |
| Income Per Month | Rs.15,000 & above |
| Employment | Salary or Self-employed |
| CIBIL Score | Minimum of 700 |
Also Read: CIBIL Score Calculator And How To Check CIBIL Score Online
Documentation Required to Apply for Debt Consolidation Loans
Documents you require to submit in order to apply for a debt consolidation loan are as follows:
- Identity Proof: Voter ID card, Aadhaar card, PAN card, driver’s licence, etc.
- Address Proof: Utility bills, rent/lease agreement, telephone bills, etc.
- Proof of Employment: Employee ID card and last 3 months’ pay slip
- Documents proving repayment ability like bank statements and salary slips
Interest Rate, Fees and Charges
Debt consolidation does not offer the guarantee that you would not be in debt again. If your credit score has improved since the time you applied for your loan, there is a chance for you to decrease your overall interest rate by consolidating your debt. This will save you money if you do not consolidate for a longer loan term.
Opting for a personal loan can help you clear your debts with a lower interest rate. However, loans on credit cards might charge a higher interest rate than other types of personal loans. It all depends on your credit score; if it is high, you can get competitive interest rates and vice versa.
Opting for a debt consolidation loan may involve paying additional fees like loan origination fees, processing fees, etc. Apart from this, there will be balance transfer fees, annual fees and closing costs. Therefore, before you take out a debt consolidation loan, learn about the different types of fees, including late payment fees or prepayment charges. This will help you understand whether taking the loan will be beneficial or not.
Is Debt Consolidation a Good Idea?
Consolidation can help in lowering your loan payment and paying back your debts sooner, only if you get a lower interest rate. It is a good idea for borrowers who have several high-interest loans.
However, consolidation may only be feasible if there has been an improvement in your credit score since applying for the original loans. If your credit score is not high enough to qualify for a lower interest rate then debt consolidating might not make any sense.
Debt consolidation might also not be a good decision if you have not assessed the underlying problems, such as overspending, that led to the debts you own at the moment. If you have a tendency to fall into a debt trap repeatedly, debt consolidation might not be the permanent solution to your problems.
If you prefer a single monthly payment and fixed interest rate and can afford to pay a single loan, debt consolidation might be the best option for you. However, not finding a permanent solution for your financial problems will lead to more such issues further down the line.
Also Read: How To Plan Loan Repayment on Time: Different Loan Repayment Options In India
Final Word
If you have several monthly payments, high-interest obligations such as credit cards, or think you may benefit from a lower monthly price, a debt consolidation loan may be suitable for you. Talk to a qualified specialist about automating your monthly payments and consolidating your debt. Check the documents required and eligibility criteria and apply for a debt consolidation loan with a financial institution.
For instant approvals and hassle-free loan disbursals in a 100% paperless manner, download the Navi App and apply now!
FAQs
Ans: Credit card consolidation is the most effective way to pay off credit card debt. When you consolidate credit card debt, you merge your previous credit card debt into a single loan with a lower interest rate. You can save money each month and pay off debt faster if you have a lower interest rate.
Ans: It is a terrible decision if debt consolidation does not save you money. It occurs when the interest rate on your new loan or line of credit is higher than the interest rate on your previous obligations, defeating the objective of debt consolidation. The sole benefit in such an instance would be having all of your debts in one location.
Ans: You can do so by taking the necessary steps:
Make a list of the debts you’d like to pay off.
List the total amount owed, the monthly payment due, and the interest rate charged next to each obligation.
Add up all of your debts and enter the total in one column.
With a debt consolidation loan, you now know how much you’ll need to borrow.
Ans: Getting a debt consolidation loan approved with a bad credit score is extremely tough but it’s not impossible. If your credit score is bad and you want to get a debt consolidation loan then you need to research and strategies. You need to bring all the payments you have to make, for example, to financial institutions and credit card issuers under one account to make it manageable.
Ans: In order to obtain a debt consolidation loan, you do not need to keep any collateral. However, you need to submit some basic KYC documents.
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