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What Is Debt Consolidation? An Easy Financial Decode

  • Highlights

  • The process of debt consolidation is to combine multiple existing loans into one

  • You have to sign a debt agreement before availing the loan

  • Instead of paying multiple EMIs, consolidate your debts into a single loan and pay EMIs due towards it

There are several misconceptions about debt consolidation. This guide will help you separate fact from fiction. Paying heed to misconceptions about debt consolidation can lead you to make poor financial decisions. You could end up with a bad loan scheme to repay your debt or make your peace with heavy penalties. On the other hand, knowing about the ins and outs of debt consolidation can help you save money, pay lower EMI and pay off your debts in a stress-free manner.

Here’s all you need to know about debt consolidation:

1. It lets you pay a range of debts with one affordable loan

Debt consolidation means paying off several debts using a single loan. It helps end the hassle of repaying multiple debts. You can pay all your debts such as credit card balances, business loans, and other borrowings using a single loan. By opting for a personal loan for debt consolidation with nominal interest rates, you can repay your debts with it and save money.

2. It does not clear your existing debts

The fact that debt consolidation reduces your debt obligation is a misconception. This process does not eliminate your debts completely; it just makes them easier to repay. Once you pay your existing debts, you still must repay the consolidation loan. This means that you will have to make EMI payments throughout the tenor to completely repay the amount that you have borrowed. The aim of the process is to make your debts more manageable.

Additional Read: 4 Ways to consolidate your debt

3. It requires you to sign a debt agreement

A debt agreement is contractual agreement between the borrower and the lender of a financial instrument. The terms of this contract govern your ability to make additional borrowings. This means that the amount of loan taken for consolidation can only be used for repayment of outstanding debts. This agreement also binds you to pay the debts over a fixed period, without any further delays. Any further delays in repayment of debts can result in the lender charging you a range of fines and penalties.

Repay your Debt with a Personal Loan

4. It restricts you from borrowing more debt during the consolidation process

During the debt consolidation process, you must refrain from borrowing any new loans. You can only borrow a single loan for consolidating your debts. Borrowing more debts during the repayment process can make you fall back into a circle of unending debt.

5. It is affordable

Debt consolidation is affordable because these loans have better flexibility and give you the benefit of nominal interest rates. Apart from that, repaying a single loan is much lighter on your pocket than having to pay various debts at varying rates of interest. The consolidation loan also offers you a range of other benefits including a line of credit. These facilities simplify the task of clearing multiple debts with ease.

Additional Read: CIBIL Score Calculation

If you are considering a personal loan for debt consolidation, it is important to keep these points in mind, so that you gain the most from this option without adding on to your financial burden.

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