Debt consolidation is the act of paying off a number of debts by taking one loan. For instance, you take one personal loan to pay off credit card bills, car loan, home loan, student loan, loans from relatives, etc. Thus, you use a single loan to pay towards smaller loans.
Debt consolidation is different from debt settlement. Debt settlement happens when the lender and borrower agree to a reduced balance as the full payment, making it easy and possible for the borrower to be free of debt. However, such a settlement negatively impacts the borrowerâ€™s credit score. When a borrower consolidates debt, he or she is utilising the funds from one loan to pay off multiple debts. Here, the borrower intends to pay the debt in full, avoiding negative impact on the credit score.
There are a number of advantages of debt consolidation:
1. Single EMI Outgo from Your Account
When you use one loan to pay off other debts, you do not have to worry about managing multiple EMIs, debits, and deadlines. With only one EMI outgo, it will become easier for you to keep track and manage your finances. This also allows you to choose smaller monthly instalments (EMIs) for a longer tenure.
2. Lowered Rate of Interest
Consolidating debt saves a significant amount of the money you pay towards interest. Suppose you were paying interest on each of the 4-5 other loan amounts. Then you apply for a loan for debt consolidation. With the new loan you pay off all debt (principle and interest) and what you are left with is a single loan (single interest and principle). This interest rate amount is far lesser than what you would have paid before debt consolidation.
3. Improvement of Credit Score
Late payments and missed payments have a negative impact on your credit score. When paying towards multiple loans at once, there are bound to be problems in expense management. In such a case, consolidating debt is the best option to keep your credit score intact. By paying off other debts with a single loan, you will only need to pay towards one single loan. This makes it easy to improve your credit score instantly.
4. No More Collection Calls
Lending institutes issue you notices, send emails and make telephone calls whenever you fault at making payments. There is also a good chance of unpleasant visits from collection agency officers. Debt consolidation helps you avoid all the stress and annoyance when you pay off outstanding balances.
5. Stress Decreases
With single outgoing EMI, saving on interest rates, improved credit score and zero collection calls, it is no surprise that debt consolidation affords decreased stress levels. This also frees you to work towards clearing the one single debt.