Personal loans are great if you want funds urgently as the loan amount is usually disbursed within a day. It can be used for a number of purposes, including home renovation, vacation, medical expenses and debt consolidation.
When you delay the repayment of debt, you have to deal with penalty charges and lowering of credit score. In order to avoid this, you can get a personal loan to consolidate debt. Debt consolidation makes grouping of debts easier and helps with working out a realistic time frame to pay off the balance debt. Some of the advantages of using personal loan to consolidate debt are:
- Lower interest rate:
The average personal loan interest rate is usually lower than other forms of debt, like two-wheeler loans, credit cards, etc. This makes personal loans a great option for debt consolidation. For example, you can take a personal loan of ₹2 Lakhs at 10% interest. Using this credit, you can pay off your existing ₹1 Lakh loan, which carries an interest of up to 18%. Make sure to compare the rates of interest charged by different financial institutions before getting a personal loan.
- Higher borrowing limit:
Personal loans usually have a higher borrowing limit than any other type of loan. There are no restrictions on how you can use the loan amount so it can be a good alternative for paying off debt. You can also negotiate the personal loan amount if your credit history is good. That being said, the loan amount quoted to you will be determined after the financial institution reviews your credit report.
- Simplifying the EMIs:
By using a personal loan to repay your debt, you can make the monthly instalments simpler. A single monthly payment made through EMI can make your life easier by eliminating the need to remember various due dates. You can combine all of your monthly payments into a single EMI with debt consolidation. This makes repaying debt easier. It helps with prioritising your debt and prevents missing any payments, which might affect your CIBIL score.
- Quicker repayment of debt:
Personal loans have fixed interest rates and EMIs during the entire loan period. You can quickly pay off your loan after consolidating your debt into a single monthly payment with a fixed rate of interest. The predictability and practicality of personal loans facilitates better financial planning and budgeting, thereby reducing the risk of late fees or missed payments.
- Clearing high interest rate debts:
High-cost debts can impact your financial health significantly. It can affect your monthly budget as well as you might end up spending a huge chunk of your income paying the debt off. A personal loan helps you pay off a high-cost debt with a single payment. After you have paid off the high-cost debt, you can repay the personal loan in affordable monthly instalments.
- Helps improve credit score:
Your credit score can be impacted because of revolving debt. You can clear your debts quickly and cut back on overall spending to improve your CIBIL score. The long-term benefit of having a good credit score is that it will help you get better loan terms in the future, in addition to fulfilling the personal loan eligibility criteria.
- Option of prepayment:
Depending on the financial institution from where you take out a personal loan, you can prepay the loan after an initial lock-in period. You might be charged a nominal fee for the same but you can repay the debt in a much shorter period of time.
- Fixed repayment tenure:
The tenure of a personal loan usually ranges from 1 year to 5 years. When you know the exact EMI to be paid and the time period to repay the loan, you will be able to budget better and manage the repayments well.
- Enjoy quick approval and disbursal:
Once the documents are verified, the personal loan application gets approved quickly. The money is then credited to your bank account within a day. Some lenders disburse the loan amount within an hour too. Therefore, you end up getting the personal loan the same day that you apply for the personal loan.
You can gain control of your budget and make progress towards a debt-free future by using personal loans for debt consolidation. Kindly keep in mind that there will be a temporary drop in your credit score initially when you apply for a personal loan. This is due to the fact that the lender will run a credit check, thereby resulting in a hard inquiry. So while you will experience a temporary drop in credit score while consolidating bt, you can rebound your credit score by following responsible credit practices. All in all, personal loans are a great way of consolidating your debt and repaying it efficiently.
