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Understanding Debt Consolidation: What is it and how to do it?
We may sometimes manage multiple financial obligations all at once. With multiple loan EMIs, credit card bills and other bills, it becomes really tough to keep track of what has already been paid and is yet to be paid. This is where the concept of debt consolidation steps in.
This blog will help you understand debt consolidation - a strategy designed to streamline your finances.
What is Debt Consolidation?
Debt consolidation means getting a new loan or credit card to pay off the old ones. When you combine all your debts into one bigger loan, you might get a better deal, like a lower interest rate, smaller monthly payments, or both.
The primary goal of debt consolidation is to make managing your debt more manageable and affordable, thus helping you get on track to pay it off more efficiently.
Let's understand this with an example:
Imagine you have 3 ongoing loans.
Loan 1: ₹3,50,000 with an interest rate of 20% and a minimum monthly payment of ₹15,000.
Loan 2: ₹2,10,000 with an interest rate of 18% and a minimum monthly payment of ₹10,000.
Loan 3: ₹7,00,000 with an interest rate of 12% and a monthly payment of ₹30,000.
In this scenario, your total outstanding payments amount to ₹12,60,000 with a combined minimum monthly payment of ₹55,000. These multiple interest rates and multiple payments can make it challenging to keep up with these payments.
Let's see how these loans can be consolidated:
To consolidate these loans, you can take a single personal loan of the amount of ₹12,60,000 @12.5% for 3 years.
This will make your monthly payment around ₹42,152, which is lower than the combined minimum payments of the separate loans.
Benefits of Debt Consolidation
1. Lower Interest Rates: One of the most significant advantages of debt consolidation is the potential for lower interest rates, which can save you considerable money over time.
2. Simplified Finances: Managing a single monthly payment is far less stressful and time-consuming than managing multiple debt accounts.
3. Faster Debt Repayment: With lower interest rates and a clearer focus on your financial goals, you can pay off your loans more quickly.
4. Improved Credit Score: Successful debt consolidation can positively impact your credit score, as it demonstrates responsible financial management.
What to Look For in Debt Consolidation
1. Interest Rate: When consolidating, the primary goal is to secure a lower interest rate than the weighted average of your existing debts.
2. Monthly Payment: Ensure the new monthly payment is manageable within your budget. The goal is to reduce your monthly financial burden, not increase it.
3. Loan Term: Consider the loan term. A longer-term reduces the monthly payment but may result in paying more interest over time. A shorter term can save on interest but may have a higher monthly payment.
4. Fees and Costs: Be aware of any fees associated with the consolidation method. For personal loans, there might be processing fees or prepayment penalties. Read the Terms & Conditions carefully.
5. Credit Score Impact: Understand the potential impact on your credit score. In most cases, debt consolidation can have a positive effect, but making payments consistently is essential.
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In conclusion, debt consolidation is a valuable strategy for those looking to escape high-interest loans. However, it's crucial to research and choose the consolidation method that best suits your needs and financial goals. With the right approach, you can take control of your financial future.
Need any assistance with consolidating your debt? Reach out to us at 0124-3682160.
Read more - Three major reasons to consolidate your unsecured debt
