How Home Loan Can Reduce Your Monthly Burden With Debt Consolidation
Do you have many loans and credit cards in your name? Is it difficult for you to track the arrears and instalments of your debts every month? Do you find it tedious to set reminders and schedule repayment dates for your debts?
If this is exactly how you feel, you probably have not heard of 'Debt Consolidation'. How about taking one new loan that pays off all your existing debts, leaving you with only one monthly payment to make? Does this sound too good to be true? That is what debt consolidation is all about.
MakaanIQ tells you more about debt consolidation.
What is debt consolidation?
Debt consolidation involves replacing several high-interest short-term unsecured debt (like credit cards and personal loans) with one long-term loan at a lower interest rate, such as a home loan. This enables you to convert your many liabilities into a single, manageable loan.
How do you benefit from debt consolidation?
By consolidating all your debts into one loan, you will be able to lower your monthly burden. Banks generally charge lower interest rates on long-term loans like home loans, compared to short-term, unsecured debt. Since your debt is consolidated at a lower interest rate, you will end up saving more per month.
However, while debt consolidation allows you to convert multiple payments into one loan at a lower interest rate and a lower EMI, the additional amount with which you pay off your unsecured debt usually gets spread over the remaining tenure of your home loan at a relatively low interest rate.
What you must know while applying for debt consolidation
While registering for debt consolidation, make sure that the value of your asset/security is higher than your total outstanding debt. Understand that you are taking a new loan to repay your other loans. The liability still remains yours. You will be eligible for the debt consolidation fund only if you are capable of taking this extra burden.
A good repayment record on your running loans and a standard credit score will have a role to play in raising your eligibility for debt consolidation.
What are the disadvantages of debt consolidation?
Debt consolidation has its drawbacks. When they have spare cash, people generally save/invest, earn money on it, or use it to repay debt. You take on further risk by applying for further debt.
It is also possible that you will take much longer to repay your debt.
Do not consolidate your debt thinking that your liability will become somebody else's. That is not what debt consolidation is about. Consider its pros and cons, take a financial advisor's help and then judge if you are in a situation where you should consolidate your debt.
Last Updated: Mon Jul 25 2016