Loan Consolidation? How It Works & When to Use It

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• A single fixed EMI for the entire repayment tenure
• A potentially lower interest rate, depending on your CIBIL score and lender terms
• A clear repayment timeline, so you know exactly when you'll be debt-free

One thing to be clear about: loan consolidation restructures your debt. It does not eliminate it. Your existing loans are paid off using the new consolidated loan amount, and you then repay that new loan over an agreed tenure. The value lies in simplification and, where possible, a lower cost of borrowing.

How Does Loan Consolidation Work in India? A Step-by-Step Guide

The process is much more simple than it appears to be. Let's see what steps are needed to apply for loan against property:

Step 1 — Get details of all the loans you are currently paying. Have information about the lender, amount, current rate of interest and pending EMI.

Step 2 — Check your CIBIL score. Most of the banks and NBFCs offer consolidation loans at a lower rate of interest if the CIBIL score of an applicant is 700 or more. The higher the CIBIL score, the better for the borrower.

Step 3 – Apply for a Consolidation Loan. You can either apply directly to a lender or you can use a loan marketplace like LoansJagat to apply for a consolidation loan. You need to submit certain documents to the lenders to which you have applied. This includes your PAN, salary slips, and details of your employment.

Step 4 — Get approval and clear existing dues. Once the consolidation loan is sanctioned, the funds are used to pay off your existing lenders. Those accounts are then closed.

Step 5 — Repay with a single EMI. From that point forward, you pay one fixed monthly instalment to a single lender. No more tracking multiple due dates.

What Are the Key Benefits of Loan Consolidation?

Loan consolidation can help in meeting the repayment obligations, as it merges the payment dues into a single scheme of payments. However, the benefits of consolidation would depend on the prevailing interest rates, tenure of the loan, outstanding amount and repayment capacity of the borrower.

• Lower monthly EMI: Consolidated loan may help in reducing the monthly EMI if the new loan has lower rate of interest or longer tenure. For e.g., Megha’s consolidated EMI was ₹25,755 as compared to ₹38,310 of old EMIs, a reduction of 41%.
• Potentially lower interest cost: Credit cards have higher interest rates (36-42% p.a.), whereas a personal loan from an app-based lender may have an interest rate higher than that of a bank or NBFC. A consolidated loan may have an interest rate between 9.99% and 20% p.a. from a formal lender.
• Easier CIBIL management: Paying back multiple EMIs may require you to keep track of all due dates. A single EMI is easier to manage and may also help avoid a missed payment. However, consolidation does not ensure improvement in the CIBIL score.
• Simpler monthly budgeting: You have only one EMI to pay back instead of multiple EMIs. It is easier to manage a single EMI and budget for the same.
• Less stress of repayment: Tracking multiple EMIs and their due dates may be cumbersome. Having a single repayment amount may ease the process.
• More focus on repayment of principal: With a lower rate of interest, you can channelise a higher portion of EMI towards repayment of the principal in the case of a consolidated loan.

Loan consolidation can help ease the repayment procedures and brings down the monthly EMI or the interest cost. However, the new interest rates, EMI, processing fees, tenure, and the total repayment amount being paid against the existing dues should be compared.

When Should You Consider Loan Consolidation?

Loan consolidation can be a good option in case you're finding it hard to make multiple payments and your new loan can offer better terms than your current loans. Before applying, it's a good idea to compare your existing EMIs, interest rates, credit profile, tenure left and other additional charges to see if it's the best option available for you.

1. Multiple dues: You have two or more active loans or credit card dues to manage.
2. High EMI burden: Combined EMIs take up a big chunk (say over 40%) of your monthly income.
3. Good CIBIL score: Having a score of 700+ might help you get better terms on the new loan.
4. Lower new rate: The consolidated loan has a lower interest rate compared to your existing debts.
5. Too many payments: Juggling between multiple payments has become a hassle for you.
6. Low score: Your CIBIL score is below 700, which might impact the approval of your new loan.
7. Near loan completion: If 70% or more of the tenure is complete, there is little benefit in switching.
8. High foreclosure costs: If the existing foreclosure charges are high, it might negate the benefits of consolidation.

9. Existing defaults: Multiple defaults may prompt you to look at other options such as debt restructuring.

    

Loan consolidation should be done only if it is going to make a positive difference to our repayment. Instead of looking at the EMI, we should evaluate the total quantum of the consolidated loan, along with an assessment of the impact on credit profile, tenure left and the ability to repay.

What Should You Consider Before Consolidating?

How do you know if loan consolidation is the right choice for your debt burden?

A simple way to assess this: calculate your current total monthly EMI as a percentage of your monthly income. If that figure is above 40%, consolidation likely makes sense. Next, you should compare the total amount of your current loans you still owe (principal) and the interest you have to pay for them. If the new consolidated loan has better terms, or the amount you have to pay monthly for it is significantly lower than for your current loans.

A few specific factors to review before committing:

• Processing fee: Most lenders charge between 1% and 3% of the consolidated loan amount. Factor this into your total cost calculation.
• Repayment tenure: Longer repayment periods result in smaller Equated Monthly Installments (EMIs), however, the overall interest paid throughout the repayment tenure would be significantly high. It is advisable to finalise a tenure that helps maintain lower EMIs without substantially increasing the overall interest payout.
• Annual Percentage Rate (APR): The Annual Percentage Rate (APR) refers to the overall cost of a loan in the form of interest rates payable and other charges levied by the lender on the borrowing entity. In accordance with RBI’s Fair Practices Code, an APR disclosure must be made to a borrower before signing the contract. In other words, the borrower should be informed explicitly of processing fees that apply and Goods and Services Tax (GST) that is due on the consolidated loan account.
• Prepayment terms: It is critical to understand whether the prepayment option is available for the consolidated loan account in case of surplus liquidity in the future.

How LoansJagat Makes Loan Consolidation Easier

LoansJagat is India's first loan consolidation marketplace that connects borrowers with consolidated loan offers from 50+ RBI-regulated banks and NBFCs such as Axis Finance, IDFC First Bank, Bajaj Finserv, TATA Capital, YES Bank, Kotak Mahindra Bank.

LoansJagat has got a 4-step process where you can apply for a loan. The first step requires you to provide your basic details. The second step asks you to provide your personal and professional details. In the third step, you have to enter your financial details and CIBIL score, after which you will be able to compare the offers side by side, based on your salary and other financial criteria. In just 2 minutes, you can check your eligibility via LoansJagat's AI-based engine.

Key features of the LoansJagat consolidation loan:

• Loans up to ₹99 lakhs
• Interest rates starting at 9.99% per annum
• EMI reduction of up to 50%
• Repayment tenure of 2 to 7 years
• Consolidation of up to 10 loans and credit card bills
• 100% digital, paperless process

LoansJagat is a leading NBFC that has been providing loans to 10 lakh + customers, disbursed more than ₹2,000 crore in loans, and has a rating of 4.7/5 on Google Reviews. When applying for a consolidation loan, you can expect to get a dedicated relationship manager to help with documentation, lenders coordination and follow-ups till the time your loan has disbursed.

To be eligible to apply for LoansJagat’s consolidation loan you need to be a salaried employee aged 23 – 58 years with a CIBIL score of above 700 and an expected net salary of ₹60,000 + per month.

Bottom Line

Loan consolidation can be a good idea, if you have several credit accounts with high rates of interest that you wish to pay off. Nevertheless, you must consider the interest rate, charges and tenure of the new loan before you proceed. You should compare the offers made by different lenders, check your CIBIL score and evaluate the total cost of the consolidated loan. With assistance from LoansJagat, you can compare and identify the best deals on loan consolidation and understand your eligibility before you apply for a loan. This can make the process of consolidating easier for you as well as help you make a better choice when borrowing money.

Frequently Asked Questions

What is a consolidated loan?

Consolidated loan refers to a loan product wherein the borrower consolidates his multiple loans or credit card dues into one single loan which has to be repaid as a single EMI instead of paying multiple EMIs and credit card dues.

Can I reduce my monthly EMI by consolidating my loans?

Yes, you can reduce the EMI by consolidating your loans if the new interest rate is lower or the tenure is long in the new consolidated loan. However, calculating the reduced EMI amount depends on various factors such as the interest rate in the new consolidated loan, the processing fees applicable in the new loan account, the existing dues in your various loans and credit card dues.

Is a consolidated loan a good option for clearing credit card dues?

Yes, consolidating your credit card dues and other loan dues can be a good option provided you have a decent credit score. It is better to compare the interest rate, processing fees and tenure in the new consolidated loan with the credit card dues before making the switch.

What credit score is required to get a consolidation loan?

There is no specific credit score required to apply for a consolidation loan, however, scoring 700 and above in the CIBIL score will get you better deals on the consolidated loan. Along with the credit score, the income, existing debts and repayment capacity are considered before approving the consolidation loan.

Will consolidating my loans improve my credit score?

Consolidating your loans will not improve your credit score directly; however, it will indirectly improve your credit score if you make timely repayments of your consolidated loan. Also, maintaining a lower credit utilisation will also improve your credit score.

When should I consider taking a loan consolidation?

It is advisable to undertake loan consolidation in case of multiple loans, high credit card dues or multiple repayment dates. Compare the new loan terms before applying.

Can loan consolidation help in reducing my interest rate?

Yes, it may help in reducing the interest rate on repayment if the consolidated loan has a lower rate than the one that you are paying against your old loans. Compare the interest rate and other charges instead of focusing on the EMI.

What should I check before going for loan consolidation?

You need to compare the interest rate, EMI, tenure, processing fee, foreclosure charges and the total amount payable before opting for any kind of loan consolidation. You should also ensure it fits well into your monthly budget.

Can I consolidate my loans if I have missed my repayments?

You may still get an option to consolidate your loans even if you have missed a few repayments. However, defaulting on payments will impact your CIBIL Score, and hence, you may not get attractive offers or get approved for the application.

Can LoansJagat assist me with loan consolidation?

LoansJagat can help you compare various deals on loan consolidation in order to meet your specific requirements. It is always recommended that you check out the terms and conditions offered by the lender along with the total amount that you would be borrowing.