Personal loan for debt consolidation: Know the pros, cons and process of using it | Mint

Debt can be a weight that prevents you from growing financially and creates unnecessary anxiety. Handling money becomes all the more complicated when you juggle several loans or credit card payments. Debt consolidation is one way to simplify your repayment process and perhaps save on costs. Let’s understand the advantages and disadvantages of personal loans for debt consolidation.

What are personal loans?

A personal loan is an unsecured type of loan. It enables one-time payment for purposes such as debt consolidation, home renovations, emergencies, or even a vacation. Personal loans are flexible and easy because they do not require collateral. However, it becomes very important to weigh things such as interest rates, terms of payments, and eligibility criteria.

Understanding debt consolidation

Debt consolidation simplifies your finances by combining various bills into one loan or credit line. You are likely to get a better overall interest rate and reduce the number of monthly payments, thus simplifying the means of dealing with your duties and making your way out of debt. To ensure that more financial problems don’t creep in, one must make sure that terms of the new loan are favourable.

Benefits of using personal loan for debt consolidation

1. Flexible repayment: Several debts get consolidated into one single loan so only one monthly instalment is paid. This reduces pressure in financial management and increases organizational ease due to the elimination of numerous dates and interest rates which require to be recalled.

2. Set payback plan: A personal loan has a specific repayment period and monthly payments. This will make clear to you when your accumulated debt will be paid in full. That makes budgeting so much easier.

3. Higher credit score: High credit score would improve through the timely payment of bills and consolidation of debt. A high credit score creates opportunities for better financial choices like lower interest rates on subsequent loans.

4. Low interest rates: Compared to other high-interest debts, a personal loan may be at lower interest rates. Therefore, you will ultimately save money by selecting a low-interest personal loan for debt consolidation.

Drawbacks of using personal loan for debt consolidation

1. Extra fees and charges: There are also fees associated with personal loans such as origination fees and prepayment penalties. You would pay off some of the savings of a lower interest rate from these fees.

2. Risk of new debt: Even after consolidating your current debts, you will continue to rack up additional debt if bad financial habits are not broken. This makes for an ever-serious cycle of borrowing and paying back.

3. Instant credit score impact: There will be a temporary hit on your credit score as there is a hard inquiry every time you apply for the personal loan. In addition, defaulted payments on the new loan may even harm your credit profile further.

4.Longer period of repayment: You get more time to repay a higher amount of a new loan. It also means that your interest payments will be higher over time. There is a need to find a balance between making feasible monthly payments and reducing the total amount of interest paid.

How does debt consolidation work?

Consolidating several outstanding loans into one loan or credit line is called debt consolidation. An overview of what constitutes consolidation debt and how the process is carried out is given below:

Conclusion

A debt consolidation personal loan would be useful to individuals dealing with many bills. This will not only lower the interest paid but also ease payments and could even raise one’s credit rating. But, when reducing debt, it is paramount to do it slowly and carefully.

Avoid bad financial practices by considering the long-term implications of getting a new loan. With proper preparation and practice in discipline, you can start to use debt consolidation as your initial step toward becoming financially secure.