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‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.
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choosing between debt consolidation and a secured loan depends entirely on the borrower’s financial situation and repayment goals. A personal loan gives you freedom to use the money for various purposes like medical expenses, education, home repairs, and other such expenses. However, debt consolidation helps combine your existing debt into one single loan, which automatically makes repayment easier with one monthly EMI. But if you have several loans and a credit card balance, debt consolidation can be a better option. For better comparison, borrowers must understand how both of these work and how they can help them with repayment or carry out major expenses.
Key Takeaways:
In simple words, a debt consolidation loan is a type of loan that is used to clear all existing debts, meaning that once all the debts are cleared, you need to repay only one loan.
Example:
You can easily combine all of them into a single debt consolidation loan. It means you need to remember one EMI, one interest rate, and one repayment date. The main purpose here is to make repayment easier and reduce total interest over time.
The process of debt consolidation is very simple and practical; here is how it works:
Read More - What Is Debt Consolidation
This process actually reduced the hassle of keeping track of multiple payments every month.
Several ways can be used for a consolidation loan; here are some of the major types considered by most borrowers:
Personal Loan
A personal loan is the most common way to consolidate debt. Major banks, NBFCs, and digital lenders provide these loans without any collateral. You can use this amount to repay:
Balance Transfer Credit Card
Most credit card companies offer borrowers the option to transfer their outstanding balance from other credit cards. These cards also provide:
Gold Loan
A gold loan can be another option, but only works if you have gold jewellery or ornaments to keep as collateral. In this type of loan, the lender keep you gold as security and offers a loan based on its market value. But why should one choose a gold loan? It is because it offers:
Debt consolidation is not something you need to use for every other loan; it works best in certain situations. It is suitable if:
However, if your income is not stable or you are unable to make loan payments, consolidation may not solve the problem.
In some cases, a gold loan can make your credit score drop to a lower level; in this loan comparison, a personal loan works best. Here is a complete explanation of how a personal loan can increase or decrease your credit score.
Every financial tool has a positive and a negative side. Similarly, personal loans also have some advantages and disadvantages:
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Fixed repayment period helps with better planning
Here is a clear difference between the gold and personal loan to understand which can be a better option for you:
The difference can be quite confusing; borrowers must compare different factors like repayment ability, interest rates, tenure, and eligibility to check which suits them the best.
Yes, loan consolidation is a smart financial decision as it helps reduce the interest costs and make repayments easier. But what if it is not suitable based on your financial needs? Let’s see how to check if it is right for you or not:
Debt consolidation is suitable when:
Most people get confused and think it is a way to eliminate debt, but it is not. Consolidation is used to reorganise the existing obligations into one manageable EMI. Make sure you avoid borrowing again unless it is necessary.
Bottom Line
There is no strong choice between a fresh loan or debt consolidation and understanding which is better. All of this depends on your personal needs and wants. If a person need extra cash for new expenses, a personal loan is the right choice and if you are struggling to manage existing debts, consolidation will help you in such situation.
However, before you decide which option is best for you, make sure to compare the interest rates, processing fees, loan tenure, and total repayment costs for both of the options. After comparison, you can easily pick the option that fits your budget and repayment capacity perfectly so you can handle your debt over time.
How does a gold loan work?
In a gold loan, you give your gold jewellery to a bank or lender as collateral. The lender checks its value and lends money as per the market value.
What is the meaning of gold loan?
A gold loan is a way to borrow money by using your gold jewellery as a guarantee for the lender.
What is the amount of loan you get on a ₹20,000 salary?
The final amount depends on your pay, other active loans, credit score, and bank rules. If you qualify, you can generally get between ₹1,00,000 and ₹5,00,000.
Is 700 a bad CIBIL score?
A 700 CIBIL score is decent and acceptable to many banks. However, aiming for a score above 750 will give you a much better shot at cheaper loans.
Is 7% a good loan rate?
Yes, a 7% interest rate is quite low and attractive for most loans. Just keep in mind that the exact rate depends on the type of loan and your credit history.
Is it a good idea to consolidate debts?
Combining your debts is smart if it lowers your interest rate and cuts down your multiple bills into one. It works perfectly if you can make your new payments on time.
What are the disadvantages of loan consolidation?
The downsides can include high processing fees, a longer time to pay back the money, or paying more total interest in the long run.
Who qualifies for a consolidation loan?
Banks look at your monthly income, CIBIL score, past payment track record, and how much debt you already have compared to what you earn.
How long does it take to pay off a consolidation loan?
It usually takes anywhere from 1 to 7 years depending on your agreement. Picking a shorter timeline means you will pay much less total interest.
What actually happens after you apply for a loan consolidation?
The lender pays off your old debts, leaving you with just one new loan and a single monthly EMI. Paying this on time simplifies your life and boosts your credit score.
