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Pros and Cons of Consolidating Debts with a Personal Loan

Pros and Cons of Consolidating Debts with a Personal Loan

23 Dec 2019
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In today’s competitive age, all of us desire to have a luxurious lifestyle. If not, at least own a decent house, car, travel abroad, etc. But what if monetary limitations restrict you from realizing your desires. This is where a personal loan can come to your rescue. Nowadays, with the help of leading financial institutions, you can avail a personal loan easily from the comfort of your home. However, if you happen to avail a personal loan, your prime responsibility should be to repay it within the stipulated time. Otherwise you may land up in a debt trap.

Over a period, you may accumulate multiple loans availed for various purposes. It is common among today’s youth who do not think before availing loans to fund their lavish lifestyles. Often, they may apply for multiple credit cards and they reach a point when they are no longer able to repay their bills in a timely manner.

Debt consolidation is one of the available options if you find yourself in this situation. Consolidation is used to repay all the outstanding liabilities and avail a single loan at a lower rate of interest or a shorter repayment tenure.

Personal loans for debt consolidation

You may consider availing a personal loan to consolidate all your outstanding liabilities. Individuals who have already chosen a personal loan to consolidate their debt may recommend it. This is because often the equated monthly installments (EMIs) may have reduced on the personal loan availed for debt consolidation. However, before you opt for this, consider the pros and cons of consolidating debt with personal loan.

If you have multiple loans availed from different lenders and the cost of borrowing is high, you may want to close all these simultaneously. Choosing a personal loan is helpful to meet this objective. A personal loan availed from one institution channels multiple EMIs into a single bill payable each month.

The amount borrowed as a personal loan may be used for any purpose without any limitations. The rate of interest is based on your profile and eligibility that is determined by considering multiple factors, such as credit score, income, and debt to income ratio.

Pros of a personal loan for debt consolidation

As mentioned, people who have already chosen this option will tell you about the several pros of a personal loan for debt consolidation. Here are five advantages:

  1. EMI reduction

A personal loan may possibly reduce EMI you are paying on your various outstanding. Generally, when you have multiple loans, the total installment is high. Therefore, when you use a personal loan to consolidate various debts, the EMI may decrease as you have to service only one loan.

  1. Fixed rate for all loans

It is likely that the applicable rate of interest for different loans varies. This makes it difficult and cumbersome for you to remember and track the loan repayment dates, interest rates, and tenures. Opting for a personal loan means you need to only monitor and track one loan at a fixed rate of interest ensuring you know the exact monthly outflow.

  1. No collateral needed

Personal loans are unsecured, which means you do not have to pledge your assets. Additionally, you do not need to provide any guarantor to back your loan. The entire process of applying and sanctioning is quick and hassle-free. With the help of Finserv MARKETS, you can avail an unsecured personal loan easily through an online application process.

  1. Fixed repayment schedule

When you service multiple loans, you need to adhere to different repayment dates and timelines. Ensuring you do not miss any of these dates is cumbersome and complicated. But, this is easily eliminated when you opt for a single personal loan providing a fixed repayment date and timeline.

  1. Enhance credit score

Too many loans can lead you to a low credit score. This is because you may have used the maximum credit card limit or the credit utilization ratio may be high. Availing a personal loan may help improve your credit score due to lower utilization and timely repayments. A higher credit score helps in case you need to avail a loan in the future.

Cons of debt consolidation with a personal loan

Debt consolidation with a personal loan is not always the best solution. There are some disadvantages too of choosing this option. Here are three cons of choosing a personal loan to consolidate your debt:

  1. End up with higher debt

This is a possibility if you do not manage your loan properly. Once you avail a personal loan, all your other loans are paid off and the EMIs discontinued leaving you with only one repayment installment. In the case, you are unable to pay the EMI on the personal loan in a timely manner which may need you to opt for another loan to consolidate this liability. Such situations end up in a vicious circle of debt trap wherein it becomes impossible to come out of the liabilities. It may be like your worst nightmare and ensure you understand all aspects of the loan before opting for this option.

  1. Prepayment penalty and other charges may be applicable

When you avail a personal loan, you need to pay the processing fees along with the applicable taxes like Goods and Service Tax (GST). Additionally, the existing lenders may levy prepayment penalties if you repay the money before its due date. It is recommended you consider these prepayment penalties and other charges at the time of applying for a personal loan as it increases the effective cost of borrowing. Debt consolidation using a personal loan is advantageous only if the cost of funds reduces after considering the aforementioned penalties and charges. You can also read about impact of GST on personal loan.

There are multiple ways in which you may consolidate your debt; however, a personal loan may be the most desirable option. To ensure you do not fall into a debt trap, efficient management of the loans is inevitable. Take into consideration all the benefits and disadvantages of consolidation to make an informed decision.

Debt consolidation does not mean that all your liabilities are paid off. It simply means the possibility of reducing the cost of borrowing and efficiently managing and monitoring a single loan instead of multiple loans.

Personal Loans from Finserv MARKETS have a fast online process and involves minimal paperwork. Transparent process, no hidden charges, instant loan approval and quick disbursal of the loan amount are some of the other advantages of availing personal loans from Finserv MARKETS. Moreover, you can also customize your personal loan to best suit your needs.

“Finserv MARKETS, a subsidiary of Bajaj Finserv, is a one-stop digital marketplace that has been created for consumers on the go. It offers 500+ financial and lifestyle products, all at one place. At Finserv MARKETS, we understand that every individual is different. And that’s why we have invested in creating a proposition – Offers You Value. A value proposition that ensures you get offers which are tailor made for you. We also offer an amazing product range and unique set of online offers across Loans, Insurance, Investment, Payments and an exclusive EMI store. Be it in helping you achieve your financial life goals or offering you the latest gadgets, we strive to offer what you are looking for. From simple and fast loan application processes to seamless and hassle-free claim-settlements, from no cost EMIs to 4 hours product delivery, we works towards fulfilling all your personal and financial needs. What’s more! Now enjoy the same benefits in just one click with our Finserv MARKETS App.”