If you have multiple debts, servicing them every month can get challenging because of the different repayment schedules and the high interest rates. This could lead to missing payments or loan defaults, which could harm your credit score, making it difficult for you to get affordable loans in the future.
If you are paying multiple debts, one of the best ways to make repayment easier and become debt-free faster is debt consolidation.
How does debt consolidation work?
Debt consolidation allows you to combine several debts into a single low-interest loan. The idea of debt consolidation is to lower your EMIs, reduce your interest, simplify your monthly payments, possibly adjust your repayment strategy to better fit your financial comfortability, and become debt-free sooner.
Let’s delve a bit deeper into the benefits of debt consolidation.
Benefits of Consolidating Debt with a Personal Loan
1. Eliminate the Hassle of Paying Multiple EMIs
Multiple debts mean multiple EMIs every month. Managing different repayment schedules can be taxing because if you do not keep track of the multiple deadlines, you could miss payments. As consequences of missing payments, you not only have to pay late fees, but also hurt your credit score. Debt consolidation helps you to club all your EMIs into one easy-to-pay EMI.
2. Save Money on Interest
When you have multiple debts, there is a high chance that you are paying high interest on your current loans. This means that your monthly payments has a high interest component, making it difficult for you to pay off the principal faster. With a debt consolidation loan, you get to shop for a low-interest loan and save money on interest.
For example, if you have three debts at interest rates of 18%, 15% and 13%, then the average interest rate at which you’ve been making payments is:
(18% + 15% + 13%)/3 = 15.3%
If you take a debt consolidation loan at 11%, you can pay off all three debts, and only pay interest on the debt consolidation loan of only 11%.
3. Reduce the EMI Amount
When the interest component is high, the EMI amount you are paying is also high. With a low-interest debt consolidation loan, the amount of EMI would be significantly lower. If you choose a longer repayment tenure, this amount will get further reduced. You will not only be able to minimise your monthly EMIs, but also get a chance to divert the funds towards your other financial goals such as investments or saving for retirement.
4. Get Flexible Repayment Options
When you are consolidating your debt with a personal loan, you have a lot of flexibility in repayments. You can conveniently choose a repayment tenure and EMI amount according to your financial comfortability.
5. Get debt free faster
Through debt consolidation, you do not have to carry on with the debt for too long. What could have taken 20 years, a debt consolidation loan can help you get debt-free in about 4 to 5 years.
Author Bio:
Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India’s first app-based credit-line. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and when they want to get a loan. He has made it his life’s mission to help and educate people on various financial topics, so email him your questions at shiv@moneytap.com.
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