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Debt Consolidation

Debt consolidation is a type of debt refinancing which involves taking out a new single loan to pay off many existing ones. Individuals paying high consumer debt can opt for consolidation loans.

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Personal Loan for Debt Consolidation

Personal loan is a highly popular credit product due to its ability to fund various expenses. While most people apply for a personal loan for marriage expenses, home renovation, medical emergencies, and other financial purposes, some might need a personal loan for debt consolidation. Personal debt consolidation loan refers to a process wherein an individual applies for a personal loan to consolidate their other existing unsecured loans and credit card bills. You can apply for debt consolidation loan online.

Debt Consolidation Calculation

You can conduct your debt consolidation calculation with the Debt Consolidation Calculator available online on various platforms. To use this tool, you will be required to enter some details such as the balances, interest rates and EMIs (equated monthly instalments) of your existing unsecured debts, like personal loans, credit cards, etc.

After entering these details, the calculator will show results based on the figures you have entered:

  • Total balance: The sum of all your debts you owe in total.
  • Combined rate of interest: Your average interest rate for all the debts you have entered in the calculator.
  • Total monthly payment: The amount you are paying monthly for these debts, including interest.
  • When you will be debt-free: The amount of time required to complete your loan/credit card payments completely, based on your current balance and monthly payments.

Look at the comparison between your existing debts and the new debt consolidation loan.

Debt consolidation is the most beneficial when your new total loan payment is less than your existing total payment and you save on interest costs.

Types of Debt Consolidation

There are many avenues open to seek consolidation debt loans, including a debt management plan, personal loan, credit card balance transfer; etc. The route chosen by you depends on your requirement, your credit score, debt-to-income ratio and other factors.

Here are some common debt consolidation types:

Debt Management Plan

This loan is sought for reducing the interest rate you pay on credit card, lower your EMIs and eliminate debt in 3 to 5 years. These plans are commonly offered by non-profit credit counseling agencies, who receive rebates on interest rates from credit card companies. 

Personal Loan

This form of consolidation loan is usually offered by a bank, credit union, P2P (peer-to-peer) lender or even a family member or friends. Personal loans are mainly unsecured and do not require any collateral. For this reason, they often come at a higher interest rate. You can opt for personal loan debt consolidation if there are multiple personal loans running on your name and you find it difficult to manage their EMI payment.

Credit Card Balance Transfer

If you have multiple running credit cards, most credit card companies will offer you a balance transfer card. These cards allow you to transfer your existing balance from running credit cards to a new credit card and make payments at 0% interest rate for an introductory period (which is usually 12-18 months). Please note that usually a transfer fee of 3% to 5% of the balance transferred is involved for this process and that fee is added to your balance. Also, you must have a healthy credit score to be eligible. 

How Do Debt Consolidation Loans Work?

Here is how instant debt consolidation loans work: 

  • You apply for a new loan and use it to pay off all or most of your existing loans/credit card balances. 
  • Now you only need to make consolidate payments for the remaining balance of the consolidated loan over the decided tenure at a lower interest rate than what you were already paying. 

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Debt Consolidation FAQs

Do I need a loan to consolidate my debt?

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If you have multiple loans or credit card bills, you can take out a new loan and consolidate all your existing EMIs under one EMI.

Should I consolidate my debt?

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Debt consolidation is a good idea for those borrowers who have various high-interest loans. However, it can only be feasible if there is an improvement in your credit score since applying for the existing loans. If your credit score is not high enough, you will not be qualified for a lower interest rate, and hence it may not make sense to opt for consolidation of debts. You can also use debt consolidation loans for bad credit, by making timely payments.

Does consolidation ruin your credit?

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You can use consolidation loans for bad credit. On making timely payments, your credit score will improve. However, if you miss paying EMIs of your consolidated EMI within the due date as specified by your lender, a penalty may be levied. Also, there is a chance of affecting your CIBIL score negatively and making it difficult for you to get loans in the future.

How long does debt consolidation stay on your record?

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Any form of debt can remain on your credit report for about 7 years, and it typically affects your credit score. It takes a long time to make that debt disappear. The debt will have less influence on your credit score over time and will even disappear from your credit report entirely eventually.

How can I settle my debt without hurting my credit?

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  • Ask for financial help from family or friends.
  • Take out a personal loan to cover your debt.
  • Take a loan against property. 
  • Opt for a Balance Transfer Credit Card.
  • Cash out auto refinance.
  • Use retirement account loans

How long does it take for a credit score to go up after debt settlement?

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If you repay all your loans, including bill consolidation loan, on time and maintain good credit behaviour, it will increase your credit score in the next 12-24 months.