Should you use a personal loan to consolidate debt? Pros and cons explained

Are you keeping track of multiple high-interest debts, EMIs or credit payments? Balancing multiple repayment schedules each month can be stressful and expensive. This is when personal loans help consolidate debt, and may come into play. But is it a short term solution or a good idea? Let’s break this down further.

What is debt consolidation?

Debt consolidation is when you combine multiple debts; credit cards, personal loans and overdrafts into one loan with one monthly payment. This is typically done by taking out a personal loan to pay off any current debts. This gives you a simplified number of accounts, a single date to meet, and may save in interest costs.

Why use a personal loan for debt consolidation?

Because a personal loan is a type of unsecured credit, you do not have to offer collateral. Borrowers love personal loans because they are:

• Easy to obtain with little paperwork.
• Disbursed quickly, often in a day or two.
• Available at reasonable interest rates if you have a good credit rating.
• Simplified repayment options help you budget as you manage your payments.

Benefits of debt consolidation through personal loans

1. Single EMI: It's exhausting keeping track of multiple creditors, due dates and minimum due dates. One fixed EMI reduces your stress and helps you avoid missing payments.
2. Less interest cost: When obtaining the loan at a lower interest rate than the existing credit that you have, you can pay less interest over time with a personal loan.
3. Increases credit score: When you are timely with repayments of a personal loan, your combined loan will improve your credit utilization ratio and your credit score.
4. Fixed term: A personal loan has a defined term, so if you are successful in repaying it, you will not go into more debt than the term of the personal loan, unlike revolving credit.

Things to consider before choosing

• Not a magic wand: Consolidation only changes the form of your debt, not the amount owed. You will put yourself in a worse debt cycle, putting more stress on yourself if you continue to spend out a budget or do not make any payments.
• Potential fees: Be wary of hidden fees with the personal loan, such as admin fee or penalty for paying it off early.
• Higher EMIs with a shorter term: A shorter term helps you close your loan sooner but usually comes with higher monthly EMIs, limiting disposable income.

Is it worth it?

A personal loan to consolidate debt is a good idea, only if you:

1. Are disciplined in your repayments.
2. Get a better interest rate than the original borrowings.
3. Do not incur a new debt while paying off the old one.

This is typically good for individuals who may have many small loans with payments running at different intervals with high-interest credit card debt.

In conclusion, combining your multiple debts into a personal loan as a means of immediately clarifying your finances and potentially saving you money. But it must be worked at through commitment, willpower, and honest budgeting. Before you sign, always read the fine print and shop around.

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