HOW TO USE PERSONAL LOANS FOR DEBT CONSOLIDATION EFFECTIVELY? FOLLOW THIS STRATEGY
Managing various debts, ranging from significant ones like home and car loans to smaller ones like credit card bills, is a common aspect of daily life. However, dealing with multiple lenders each month can be cumbersome and expensive, especially if some debts carry high interest rates. In these situations, debt consolidation can simplify and reduce the cost of debt repayment.
Using a personal loan for debt consolidation can be an effective strategy. Below are some of the potential advantages:
- Streamlines payments: Consolidating multiple debts into a single loan simplifies your financial management by reducing the number of monthly payments you need to keep track of. By consolidating multiple bills with various due dates and minimum payments into one, you’ll only need to track and manage a single consolidated payment each month. This streamlines budgeting and minimises the chances of missing payments due to oversight. Additionally, handling a single loan removes the necessity of logging into multiple accounts or sending out numerous checks. This can save you time and effort in debt management. With debt consolidation, qualifying for a lower interest rate may make your monthly payment more manageable, allowing you to free up additional funds in your budget for other financial objectives.
- Possibly reduced interest rates: Swapping high-interest debt for a lower-interest personal loan has the potential to save money on interest over time. Credit cards, payday loans, and specific store financing options frequently come with notably higher interest rates compared to personal loans. Combining these debts into a personal loan featuring a lower interest rate can lead to reduced interest charges throughout the loan period. Your eligibility for the interest rate on a personal loan hinges on factors such as your creditworthiness, the loan amount, and the loan term. Generally, a good credit score and a shorter loan term result in lower interest rates.
- May aid in avoiding tapping into savings: By consolidating payments, you may reduce the likelihood of needing to use your savings to meet debt obligations. Streamlining debt management minimises the chance of missing payments and incurring late fees, which can strain your budget and necessitate dipping into savings to cover these unforeseen expenses. By exchanging high-interest debt for a lower-interest personal loan, you may be able to reduce your monthly payments. This allows you to have more money in your budget that you can direct towards savings rather than using it to pay off high-interest debt.
Before opting for debt consolidation with a personal loan, it’s essential to take these factors into account:
- Credit score impact: Applying for a new loan may temporarily lower your credit score.
- Loan details: Familiarise yourself with the loan term, interest rate, and any applicable fees related to the personal loan.
- Maintain discipline: Remember that consolidation alters how you handle debt; ensure you adhere to your repayment strategy with the new loan.
Debt consolidation essentially streamlines debt management and may create additional room in your budget, decreasing the need to rely on savings to fulfill debt obligations.
Frequently Asked Questions (FAQs)
Q. What are the usual interest rates one can expect on personal loans?
Interest rates for personal loans in India typically fluctuate based on various factors such as:
- Credit score: Borrowers with higher credit scores, usually above 720-750, often qualify for lower interest rates.
- Loan size: Smaller loans may carry slightly higher interest rates compared to larger loan amounts.
- Loan duration: Shorter loan terms generally attract lower interest rates compared to longer-term loans.
- Lender policies: Each lender employs distinct risk evaluation methods, leading to varying interest rate offerings.
Q. How does the duration of the loan (repayment period) impact both my monthly payment amount and the overall interest expense?
The duration of your loan term, which represents the time you have to repay your personal loan, has a significant impact on both your monthly payment and the total interest expense. Here’s a breakdown of this relationship:
Effect on monthly payment
- Longer loan term: A longer loan term results in a lower monthly payment. This occurs because the total loan amount is spread across more payments. For instance, a 5-year loan will have a lower monthly payment compared to a 3-year loan for the same amount borrowed.
- Shorter loan term: Conversely, a shorter loan term leads to a higher monthly payment. Since you’re repaying the loan over a shorter period, your monthly payments must cover more of the principal and interest in each installment.
Effect on total interest cost
- Longer loan term: Despite the lower monthly payment, a longer loan term often leads to a higher total interest cost. This is because you’re paying interest for a more extended period, resulting in a greater overall interest amount paid over the loan’s life.
- Shorter loan term: In contrast, a shorter loan term results in a lower total interest cost. The higher monthly payments enable you to pay off the principal faster, reducing the time over which interest accumulates and thereby lowering the total interest paid.
Q. Do borrowers with poor credit have access to any personal loan options?
In India, borrowers with bad credit can access personal loan options, although the terms may be less favourable compared to those with good credit scores. Here are a few options to consider:
Secured loans
Secured loans differ from unsecured personal loans in that they necessitate pledging an asset, such as a vehicle or property, as collateral. This reduces the lender’s risk and could increase the likelihood of approval, even with a poor credit score.
- Advantages: Secured loans frequently feature lower interest rates for borrowers with poor credit, along with potential eligibility for higher loan sums.
- Disadvantages: In the event of loan default, the lender retains the right to seize your collateral.
Lenders specialising in bad credit
Some lenders or non-banking financial companies (NBFCs) focus on providing loans to individuals with poor credit. While they may impose higher interest rates and stricter eligibility criteria than conventional banks, they could serve as a viable alternative if you’ve faced rejections elsewhere.
Co-signer loans
Having a co-signer with good credit can greatly enhance your approval prospects for a loan. The co-signer effectively assures repayment in case of default, bolstering your application.
Additionally, you might explore alternative avenues such as a credit card balance transfer (provided you qualify for a lower interest rate offer) or seeking financial assistance from friends or family. These alternatives could be more advantageous than opting for a high-interest personal loan with a poor credit history.
Q. What’s the usual timeline for getting approval on a personal loan?
The approval timeframe for a personal loan in India can fluctuate based on various factors, but here’s a general outline of the processing time:
- Speedy approvals (possibly within a day): Certain lenders, particularly for pre-approved personal loans aimed at their current clients, may provide online application options with rapid approvals (sometimes within minutes) and swift fund disbursement (typically within 1-2 business days).
- Typical processing duration (several days to a week): For applications needing additional verification or processing, such as those from first-time applicants or those with intricate profiles, approval times typically span from several business days to a week. This often entails document authentication, credit score assessments, and income verification conducted by the lender.
Q. What factors influence the processing time of a personal loan?
The approval timeframe for your personal loan application in India can be impacted by various factors. Here's a breakdown of key elements that can affect the processing time:
- Application completeness: Submit a thorough application with all necessary documents to prevent delays due to missing or unclear information.
- Lender’s processing efficiency: Each lender operates with their processing speed, impacting how quickly applications are reviewed and approved.
- Creditworthiness: Applicants with robust credit histories and financial clarity often undergo a swifter approval process.
- Loan size: Larger loan requests may necessitate a thorough evaluation, potentially lengthening the processing time.