 "Your Personal Loan Can Help You Consolidate Debt")
Are credit card bills and other expenses weighing you down? Don’t let your credit card hurt your finances. See how you can prepare a debt consolidation strategy with a Personal Loan.
Anamika Gupta, a marketing executive from Noida, had missed her credit card bill due date for a third month running. Her quarterly house maintenance payment was also overdue by a month. And with multiple bills piling up, she was worried about managing her expenses.
The real burden on her finances was the car loan she availed two years ago. The Rs.7.5 lakh loan – taken at an interest of 9.4% p.a. – was payable over five years. Her EMI of Rs.15,715 was due on the 15th of the month. Her home loan was due on the 5th and her credit bills were payable on the 22ndof the month. Her parents were dependent on her, and her salary, which was credited on the 1st, would cover these costs, but only just.
This meant she hardly had any spare cash for emergencies.
Her financial troubles where compounded by the fact that her promotion had not come through last year. With a salary increment not likely this year as well, she had a sinking feeling about her expenses. And the stress was beginning to affect her health as well.
The Burden of Debt
Anamika is not the only one with such issues. It is common for millennials today to overextend themselves when it comes to their finances. With multiple offers on credit cards and other means of financing, it is tempting to acquire things on credit. It seems hassle-free to lead a life without any debt. But realistically speaking, that’s not always possible.
People also like to spend on different things. So, avoiding consumption altogether is not always possible. But, you can be intelligent about managing expenses. Use loans to your advantage of the fact that loans are easy to come by.
Anamika’s problem was that she had too much debt on her hands. But a careful study of her car and home loan suggested that she had gotten a good deal. Her home loan got her tax breaks as well. At best, Anamika knew that she could increase her car loan tenure to reduce the monthly EMI payment.
But that wasn’t going to be a solution. Anamika’s bigger problem was the multiple due dates that were causing her cash flow issues. Managing the credit card bill was the biggest complication. This is why she needed a debt consolidation strategy.
The Dynamics of A Debt Consolidation Strategy
A debt consolidation strategy implies merging separate loans into one single loan. This also includes loans taken from different financial institutions and on credit cards. You refinance all outstanding loans with a new loan from a single institution.
The two key advantages here are that you get to pay a uniform rate of interest on all the loans on a single day. This is especially beneficial for those running high credit card dues. That’s because there the rates can be more than 40% per annum.
Secondly, you will be done with the month’s EMI outgo on a single day. No more worrying about any cash flow management.
How to Consolidate Debt:
In Anamika’s case, she can either approach her existing bank or any other non-banking finance company (NBFC). Most of these institutions offer debt consolidation loans. They could offer to take over her past debts. In exchange, she would have to pay back the Personal Loan for debt consolidation.
- First, she would have to make a list of all her outstanding liabilities. She has to list the repayment periods and the interest that she is paying on each of them
- She can then take a loan to cover all the debt. This can be paid off over a period of seven years. She can, thus, pay much lower monthly instalments
- Most banks offer Personal Loans with interest rates above 11%. So, the debt consolidation loan can cover the debt with higher interest rates.
Anamika also used her insurance policy – with a sum assured of Rs.50 lakh – to negotiate a lower interest rate. She managed to get a loan at 10% interest for five years. The new rate would be applicable on a reducing balance basis. This resulted in significant savings of more than Rs.6,000 per month for her. It also eased her liquidity problems to an extent.
It may make sense for you to adopt a similar strategy too. But you need to make sure the strategy works for you.
The Bottom-Line
A Personal Loan can be used for multiple purposes. Getting a sanction for these loans is easy as well. Lenders look at the applicant’s credit score, income, and repayment capacity. Unsecured Personal Loans usually come with higher interest rates. But with collateral, you can avail reduced rates.
In fact, you can use a line of credit to meet the same goal. A line of credit, such as the one offered by Bajaj Finserv , is a credit facility that allots you a specific amount of money. When you need to access money, you can withdraw and use any amount as long as it is within the allowed level.
Interest is calculated only on the amount you’ve withdrawn. This means you have the option to take only as per your requirement and repay a comparatively smaller amount.
Whether you choose a Personal Loan or a line of credit, remember to keep your financial capability in mind.