It is very common for people to have multiple creditors, especially for people who are in financial hardship. Some people are able to pay the instalments regularly, and many others are not. Plus, if you are using multiple credit cards, store credit accounts, and other unsecured personal loans, over time, it becomes difficult to track and regularly make payments towards each of these debts.
In such a scenario, a debt consolidation loan can offer ample respite. Debt consolidation means to combine multiple unsecured loans or debts into one common loan, also known as the debt consolidation loan. Such loans are offered by almost all banks across the country. Once a debt consolidation loan is taken out, the other loans that are combined into it are automatically closed.
A debt consolidation loan offers several benefits. These include:
- Possibility of lower interest rates – Often times, when consolidating several debts into one loan, the interest rate on such new loan gets effectively reduced. This ultimately results in less interest payment, compared to if all the debts were maintained separately. For example, if someone has 3 credit cards, first with a $2000 debt, second with a $5000 debt, and the third with a $10,000 debt. It is quite likely that the interest rates charged by each of the 3 credit card companies is different, but what if the company that has issued the card having the $10,000 debt, charges the highest interest rate. In such a case, combining these debts would be beneficial because of the reduction in the overall interest rate. Thus, this helps in reducing the amount to be repaid every month, and increases the savings of the debtor.
- Flexibility of repayment terms – Banks often offer the flexibility to debtors to fix their own repayment terms, such as deciding whether they would like to repay on a weekly, fortnightly or monthly basis.
- Less stress of debt management – With debt consolidation, one has to focus on repaying only one loan, rather than worry about repaying several debts every month. This helps to resolve the debtor’s much of the undue emotional distress.
- Clear Focus – Having just one loan to be repaid by the end of a period, rather than multiple loans with different timeframes, is often more encouraging to stay focused and motivated towards repaying the debt and becoming debt-free.
But before taking out a debt consolidation loan, one should think through certain things such as:
- Consider the charges and fees levied by the bank that issues the loan
- Check if the bank requires any security before sanctioning the loan to you. Generally, the banks do not ask for security against the loan, but in case they do, it means that in case of non-payment of loan on your part, the bank can sell that asset and recover the loan amount
- Ensure that your income is enough to be able to pay the monthly instalment of the loan, if taken, because if you are unable to repay, then your debt would just keep compounding, and your situation would have just become worse than earlier
- Consider other available options for managing your debt such as debt agreement, personal insolvency agreement, etc.