Debt Consolidation loans, additionally called credit consolidation or bill consolidation, is a budgetary strategy, wherein you combine various loans and outstanding payments. At this point, you can use your single personal loan to pay off the entire debt at once.
Hence, by applying for the debt consolidation loans, you will be paying a lower sum of interest on your credit and can also help to clear your credit card dues. However, it is important to fulfill your debt consolidation loan without defaults.
Debt Consolidation loans come with various advantages. One such advantage can be said is that it can easily simplify payments. You can pay off the personal loan debt within a given time period instead of tracking the due dates of other several cards and payments. However, one must need to understand how they gain from debt consolidation or whether they should opt for this method or not.
How does the Debt Consolidation work?
While aiming over whether debt consolidation is the best alternative for you, consider two or three things to assure that doing this will bring down your monthly payment amount.
An instance of Debt Consolidation
Let's assume you own three credit cards. You have an exceptional amount of INR 1,00,000, and it is exacerbated month to month at a yearly rate of 24%. At the end of 6 months, your aggregate sum with interest would be INR 1,12,616. This would get reduced to INR 1,05,315 if you somehow happened to merge your credit cards into a loan by reducing the balanced rate of 18% per annum. Does debt consolidation seem like a good idea now?
Consequences of Debt Consolidation Loan Defaults
The outcomes of a debt consolidation loan with defaults depend upon the sort of loan you have and the subtleties of the credit agreement. Obviously, defaulting on any loan can cause disturbance to your credit rating, and you will face many difficulties while trying to get a loan in the future. The outcomes may differ or change in case of secured or unsecured loans.
- Secured Loans
A home loan or a car loan is said to a secured loan in banking terms. In fact, the house or the car act as the security with the bank– if you neglect to pay, your home or car can be taken as credit payment for the debt. Thus, it is not a fun situation to consider in one's life. A loan against a car or home is considered a secured loan by the bank.
Home loan equity is also called a second home loan. As a security deposit of putting your home up as security, you will get a single amount of payment or a credit extension, which you will reimburse in regular monthly payments followed by interest charges and loan fees. If you default on a home loan credit, the loan lender can dispossess your home after around 120 days after you first default.
An automobile title loan depends on a similar idea as a home credit loan. Depended upon your credit rating, you might be charged an incredibly high-interest rate on this sort of credit, which can expand your odds for defaulting on your payments.
- Unsecured Loan
An unsecured loan is any debt or commitment that isn't secured or protected property or insurance. Essentially, unsecured debt is an obligation that isn't protected with a benefit, for example, student study loans, hospital expenses, and credit cards. If you default on debts without collateral, there is no property for the loan lender to recoup, so they will put everything on the line to get some kind of payment from you.
Most unsecured loans offer a grace period to make the regular monthly payment, yet others may not, so you should know the subtleties of your payment agreement. If you default on an unsecured loan, you will be charged a penalty and an expanded interest rate on the rest of the credit balance. Following 90 days of non-payment, your credit account will be considered in default and your credit account will be gone over to a collection division or agency.
Somewhere in the range of 120 and 180 days if you have not reached the moneylender to arrange a reimbursement plan, your account, you will be confronted with continuous phone calls from the collection department to recover the credit payment.
Is Debt Consolidation a Good Alternative?
If you have a generous debt and wish to improve your money related issue, debt consolidation loans can help. A high credit card bill or different obligations can be overpowering, and the failure to make timely payments can cause you significant damage. In such cases, a cautiously curated personal loan alongside debt consolidation loan with defaults offers an approach to pay off timely payment with a lower loan rate and a progressively smoothed out payment plan.