Be it a meagre credit card bill or a hefty home loan, everyone comes across debts. If you are going through a phase wherein you want to get rid of all your debts in one go, then debt consolidation is the solution for you. Debt consolidation is a process of combining all your loans, credit cards, medical bills etc. converted into one big loan and clearing it off. After retirement, since the income goes down, getting a loan becomes difficult hence, debt consolidation is also considered, if you’re planning for an early retirement. Therefore, it is advised that you clear all your existing debts before retirement and enjoy a financial burden-free retirement.
What are the benefits of debt consolidation?
1. Convenience –
Paying multiple bills becomes difficult and it is only human to forget. Keeping a continuous track of all your loans is also a task. This could cause you to miss a payment and eventually hamper your credit score. Therefore, it is advised that you consolidate your debts for convenience and to avoid any error.
2. Helps Scheduling –
Multiple loans imply multiple due dates and juggling between constantly between them. Instead you can create a single bill to be auto-debited every month.
3. Brings down your interest rates –
Having multiple loans mean paying multiple interest rates on each bill. This means that you end up paying a higher amount than anticipated, just on loans. Consolidating all your loans significantly brings down the extra amount that you spend every month only on interests.
4. Helps in paying off your debts faster –
This is the easiest way to get rid of debts and pay lesser interest rates. Collating all debts, in one single payment via debt management reduces the interest rate drastically.
5. Helps during emergency situation –
Consolidating all debts to one single payment will reduce your monthly payment amount as there will a fall in the rate of interest. This will help you in save money and invest in different places. Investing in various places will allow your money to grow and that money can help you during emergencies as well.
When should you consolidate your debts?
You should analyse your financial situation and see if your situation demands the consolidation. You can use personal loan to consolidate debt. The following should be the cases for you to opt for one:
When expenditure surpasses your income
If the credit outstanding is on the rise every day
The interest amount on your card is higher than the monthly expense on your card
If you are only paying the minimum due every month
You have debts in the form 5 or more credit cards
Your CIBIL score has started plummeting
You are always close to extinguishing your credit card limit
The interest on your credit card is over 18%
How to consolidate your debt?
Step 1 – Make a list of your debts and club all the high interest rates and if there are no high interest debts. Club all low interest debts.
Step 2 – Calculate the average rate of interest you’re paying on each debt. And then calculate the rate of interest you will be paying upon consolidation.
Step 3 – Compare the minimum amounts of all your debts with the EMI you will pay if you consolidate the debts. If your EMI is cheaper than the rest of debts, then definitely go for consolidation.
Step 4 – Finally, approach the lender of your choice.
Ensure that you consolidate your loans only if they are for a longer duration. Consolidating debts which are only for 6 months are not required. As you may end up paying a lot more than expected. If you have one major loan and other minor loans, in that case too, a consolidation may not be required.
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