What is a Debt Consolidation loan?
As the name suggests, it is the combination of all the debt together into a single loan. It simply means terminating all the previous old loans and making a new loan that amalgamates all the old loans. The biggest advantage of such consolidation is the terms of the agreement. The terms are inclined towards conducive payoff such as lower instalments, lower interest rates, et cetera.
Personal loans for debt consolidation
Debts over debts have an amplifying effect. Personal loans, taken for debt consolidation, help to reduce this amplification in the form of lower interest rates. Following are a few of the reasons for opting for personal loans for debt consolidation:
One payment for EMI: Consolidation helps maintain the track of the EMI payment as it saves one from the tracking of multiple payments for various EMIs. Any default in payment can hamper the credit score and the relationship with the lender. Thus, monthly payment makes tracking much easier.
Lower rate of interest: Personal loans have a lower rate of interest when compared to others. Hence, choosing a personal debt consolidation loan is a feasible option. However, to get the lowest rate of interest, one needs to make sure to compare the interest rates charged by the various lenders and opt for the best one.
A fixed period of repayment: Personal loans are usually offered with a loan repayment period of 1 to 5 years. This leads to knowing the exact payment required to be made every month. Thus, it can help one manage his finances in a better manner.
Cons
Till now, we have looked at the benefits and features of this type of loan. However, everything has both pros and cons. Let’s look at the cons of this kind of loan:
Additional hidden cost
Many a time, the lender includes various elements in terms of the agreement, which leads to hidden costs such as annual fees, transfer of balance fees, consolidation fees, et cetera. Thus, this calls for being extra cautious and understanding the true costs involved with debt consolidation.
Higher interest rates if the credit score is not compatible
Debt consolidation leads to lower interest rates. However, if one does not have a good credit score, then that can lead to high-interest rates. This implies that the Annual percentage point (APR) will be on the higher side.
Not the ultimate solution to the financial issues
Debt consolidation, indeed, helps in simplifying the payment structure. However, it’s far from being true that this does not dissolve one from the debt burden. Although debt consolidation came with the intent to provide financial relief to the lendee, it has also been seen that consolidation can also lead to cascading effects. People exploit this benefit and get stuck in debt traps by taking further debts. This does not solve the ultimate problem and even hampers the credit score.
Conclusion
Debt consolidation is an effective way to pay off all the debts that are favourable to the person receiving the loan. Lower interest rates, fixed monthly instalments, and a fixed period of tenure are a few of the reasons to opt for consolidation. It makes managing the finances much easier. However, one must assess the feasibility of such consolidation and ensure that he has an adequate credit score to absorb the advantages of debt consolidation. It also allows the development of better monetary habits by equalising the debts in a quicker manner.