Multiple creditors and payments become too difficult to keep track of, resulting in a creditworthiness deterioration. A debt consolidation loan comes in handy in these situations. It aids in the consolidation of numerous smaller loans by paying them off with a single new loan.
What is a Debt Consolidation Loan?
A debt consolidation approach allows a person to pay off several liabilities, such as several smaller loans, credit card bills, overdraft amounts, and so on, with a new, more favorable loan (lower interest rate, lower monthly payments, or both).
Types of Debt Consolidation Loans
- Secured loan: These loans are protected against collateral such as real estate, vehicle, gold, insurance policy, equity, etc. which can be easily converted to cash. A secured loan can be used to combine several unsecured debts.
- Unsecured loan: An unsecured loan is not secured against collateral and is solely issued basis the credit history and CIBIL score of a person.
Eligibility and Process of Debt Consolidation Loans
A bank, financial institution, credit card company or a credit union can issue a debt consolidation loan to a person who meets the below eligibility criteria:
- Age of the person should be 21 to 60 years
- The monthly salary of the candidate should be at least ₹15,000. However, this varies per bank, city, and other factors
- Applicant must be residing in the city of application since a year
- Applicant should hold a minimum working experience of 2 years
- All documents should be fair, true and duly submitted. The types of documents include – address proof, ID proof, bank statement, salary proof, etc.
- A person must have a good CIBIL score – ideally 620 above, though some exceptions can be made by lenders here
Process of Debt Consolidation Loan
Applying for a debt consolidation loan is simple if one meets the eligibility. The process includes:
- Analyzing the official website of institutions offering debt consolidation loans
- Conducting a comparative analysis based on interest rates, payment terms, etc. and selecting the ideal one
- Filling the form and applying for the loan from the chosen lender
- Submitting all necessary documents required
- Upon loan approval, the sum is deposited in the bank account to be used by the borrower for the said purpose.
Overall, it appears as an attractive financial move, though it must be opted for with utmost caution and after deep analysis of all advantages and disadvantages.