Burdened with numerous loans? You might want to consolidate them into one

Getting a loan today is not very hard. All one needs is a good credit score, an account with a bank, and an average salary to repay the loan. Given this ease, we end up taking a number of loans, for who doesn’t want to have extra money? You wanted to buy a new bike, so you took a two-wheeler loan. You wished to gift your partner the latest iPhone, so you took a personal loan. You planned an international vacation with family, with a travel loan coming in handy.

There could be multiple reasons for us to take loans, with the thought of being able to fulfil all our desires overriding the practical aspect. This joyride is often short lived, for the burden of repaying a loan can be daunting.

Paying multiple interests rates will leave you high and dry, especially if the loan was an unsecured one. Typically, the interest rate could range from 10% to 20%, depending on the type of loan taken, and paying EMIs could drain out not only your salary, but also your savings. There could be times when you are forced to dig into your saving schemes to repay the debt.

So what does one do on such occasions? We can’t just run away, leaving our family with the burden of repayment. Neither can we delay payments.

There is a simple, yet often overlooked solution in this case. One could choose to consolidate their debt.

What is debt consolidation?

Debt consolidation refers to the process of combining multiple debts into a single loan, wherein one is expected to pay a single interest rate rather than different rates. In simple words, it is like putting all your eggs in one basket, with one expected to pay attention to this basket rather than individual eggs.

With regards to loans, it is as simple as taking a new loan to clear existing loans. One can also choose to go in for debt consolidation if he/she has numerous credit card bills, with the interest component going up with each missed payment. Technically, one can choose to consolidate different kinds of debts through this.

Advantages of consolidating your debt

So how much sense does a new loan make when you are already paying the interest for multiple loans? One might argue that it needn’t truly help them, for they are still going to repay the same amount of money. True, the principal amount remains the same, but the interest for multiple loans can be exorbitant. With a single, consolidated loan, there is a single interest which needs to be paid. This interest can be lower than the average of interests which were being paid under multiple loans, thereby helping one save some money.

In addition to saving money, this loan also reduces the confusion associated with multiple EMIs. With a number of loans, there is a possibility of missing an EMI (especially if there is no standing instruction). All this can be avoided when there is just a single EMI to be paid.

Should you choose a secured loan or unsecured loan for debt consolidation?

A secured loan is one which is taken in lieu of some security/collateral. The most common types of secured loans are home loans, gold loans, etc. An unsecured loan is one which is taken without putting up any security/collateral. A personal loan is the most common type of unsecured loan.

The benefit of taking a secured loan to repay existing debt is that the interest rate for such loans is typically much lower than the interest rate for an unsecured loan. Additionally, taking multiple unsecured loans can have a negative impact on the credit score of an individual. If the previous loans were unsecured, taking a secured loan can help improve the credit score.

When you shouldn’t go in for debt consolidation

Debt consolidation might seem like a good idea, but it should not be used under all circumstances. Individuals who have multiple, low quantum loans which can be repaid within a specified time (say 1 year) with existing resources should reconsider the thought of going in for debt consolidation. This is primarily because one wouldn’t stand to save a lot of money in such cases, for banks do charge a certain processing fee to sanction a new loan.

A loan is ideally designed to help people out during financial emergencies, but excessive use of this provision could be counterproductive. One should always think about the consequences of excessive debt before jumping into this pit.