Unpaid outstanding credit card dues or loan EMIs force you to incur debt at an ever increasing rate. This gives rise to a snowball effect and can leave you with a burden too difficult to carry. One way of tackling such a situation is to apply for a debt consolidation loan and pay off all outstanding debt in one go. The idea here is that you avoid the high penal interest and thereby service your new loan at a lower rate. While you can avail various loans to consolidate debt, a personal loan is convenient as you can obtain one without pledging any asset as security.
Here’s how you can consolidate your debt with a personal loan.
Find a lender that offers you an economical rate of interest
Debt consolidation works to your financial advantage when your new loan attracts lower interest than the cumulative interest of all other debts put together. To maximise your benefits, compare lenders, and pick a loan carrying a cost-effective personal loan interest rate.
Normally, unpaid dues attract additional fees and increased rates of interest. Tackling these high-APR borrowings becomes a priority, as you go on incurring interest on interest when you have pending dues. By using a debt consolidation loan, you can do away with high interest rates and service a more affordable personal loan.
Obtain a large sanction to clear all debt in one go
When in debt, always try to clear borrowings with the highest cost or highest interest first because this will ensure that you save more. On the other hand, many financial advisors also advise you to tackle the smallest debts first in order to reduce your debts by at least one and then move on to the next one that you can afford to repay completely.
However, you can opt for a third option and pay off your entire debt in one go by availing a large sanction through a loan like the Bajaj Finserv Personal Loan for Debt Consolidation. Here, you get financing of up to Rs.25 lakh on a collateral-free basis. Tackling all outstanding dues with a large personal loan makes sense when the monthly cost of the personal loan is lower than that of each individual debt put together. This also allows you to increase your credit score.
Tweak your monthly budget and focus on paying a single EMI
Apart from the financial advantage of saving more, clearing your debt in one attempt puts you on the front foot in terms of financial planning as well. When you consolidate all debt with a personal loan, you reduce your monthly payments to a single EMI. With fewer EMIs to pay and fewer due dates to keep track of, you can focus all your attention towards making one payment a month, diligently. Paying one EMI is definitely simpler than 3 to 4 different ones: it helps channelize your finances effectively, allowing you to avoid penal charges and tackle debt with less anxiety.
Ease the pressure on your finances by picking a long tenor
Personal loans offer you a repayment tenor ranging from 12 to 60 months. To start off, having a long tenor is a good thing, especially if credit card debt is one of the debts you presently own. Since credit cards are a type of revolving credit and do not have a fixed tenor, you can be tempted to avoid full payments and postpone paying pending dues. What happens here is that you incur interest on interest and your debt increases by large amounts quickly. With personal loans, the fixed tenor ensures that you approach repayment with a plan, having the end in sight.
Further, by choosing the tenor that is right for you, you can lower your EMIs and thereby ease the strain on your finances. By splitting up your EMIs over a larger number of months you reduce the value of each individual EMI. However, it is always recommended that you pick the shortest tenor you can manage as this keeps your interest outgo to a minimum. To plan effectively, use a personal loan EMI calculator.
Lower your outgo by making part-prepayments at minimal charges
Since your debt consolidation loan carries a lower interest rate, it is reasonable to assume that your financial position and your credit score will improve with time. Once you get a grip on your finances by paying personal loan EMI payments diligently, devote surplus finances that you may have towards making part-prepayments.
Here, you pay off a portion of the personal loan’s principal amount and thereby lower your overall interest. This technique is profitable when your interest savings outweigh the personal loan part-prepayment charges. For instance, with Bajaj Finserv you can make prepayments at a nominal charge, a fee that is reduced to nil for flexi loan users.
A final advantage of opting for a debt consolidation loan is that you can get it quickly and with minimal documentation. To get the finances you need in the bank in 24 hours, check your pre-approved personal loan offer from Bajaj Finserv. By doing so, you get instant approval through a customised deal.
