When talking in terms of finance, consolidation loans takes place when a person pays off some smaller loans along with a bigger one. The bigger loan will usually have less interest rate than smaller ones. In literal terms, a consolidation loan is something which pays off two or more loans with a single new loan. The installment amount is also lower than that of combined installments which you would end up paying in small different loans.
Consolidation Loans
To understand the term consolidation loans in a refined manner, it is necessary to understand the different categories of consolidation loans.
Student Consolidation Loan
A student should be a graduate for availing this loan. The student can take all the loans (different small loans taken over time) from each year and the lender will gather them or consolidate them into one. This usually locks the interest rates and they do not tend to rise over time. With consolidation loans in place, a student has not to worry about different loans as the amount has been consolidated into one.
Unsecured Consolidation Loan
This is a consolidated loan which banks and credit unions offer. This is also known as a signature loan and usually has a higher rate of interest than other loans. The interest rate on this loan is lower than a credit card but is usually more than a mortgage loan. The consolidation loan is also offered as a home equity loan and you can borrow against your home.
Eligibility for Consolidation Loan
- The age of the applicant should be a minimum of 21 years and a maximum of 60 years.
- The minimum salary of a person seeking a consolidation loan should be Rs 15,000/- per month.
- The applicant should be a resident of the place where the loan has been applied for a minimum of 1 year.
- All the documentary proofs including address proof, identity proof, bank statements and salary statements in case of salaried person have to be submitted.
Rate of Interest on Consolidated Loan
The rate of interest on the consolidated loan depends upon a range of factors including the credit profile of the borrower. Generally the interest rates of consolidated loans vary from 12% to 30% depending upon the amount of loan and the EMI period for the consolidated loan.
Benefits and Loss of Consolidation Loan
| S.No | Benefits | Loss |
| 1. | Single payment: All the loans will be consolidated into one. This makes life easier to manage as you have to pay only a single EMI for the loan. | The debt is still to be paid: Availing the consolidation loan does not mean that the amount has not to be paid. The consolidated EMI is still to be paid every month. |
| 2. | Reduces Stress: Consolidation loan takes away the stress of catering for multiple loans and the borrower can focus on other issues in life. | Your collateral is always at risk: The collateral against which you have secured this loan is at risk until all the EMIs are paid. |
| 3. | No collection calls: Availing consolidated loans means that collection calls from the banks will stop and you only have one EMI to pay. | Higher interest rates: At times, the interest rates are also higher than other categories of loans. |
| 4. | Improves credit score: It also helps in improving the credit score as you only need to pay one EMI which can be done on time. | Credit score can fall also: If you fail to pay off the EMI, the credit score can fall. |
Conclusion
Debt consolidation loans in India offer a practical solution for managing multiple debts. By merging various loans into a single one, you can simplify your finances, lower your monthly payments, and potentially reduce the overall interest rate. This approach not only makes debt management more straightforward but also helps in improving your credit score over time by ensuring timely payments. However, it’s crucial to carefully assess the terms of the consolidation loan, compare options from different lenders, and consider your financial situation to ensure that this solution aligns with your long-term financial goals.
Read Also: Knowing About The Secured Loan and Unsecured Loan
