Loan guide: What are benefits of consolidating loans? How to consolidate multiple loans into one payment?

Loan guide: Financial management can be an overwhelming job for a lot of people, and when it comes to multiple loans, it's not easy to keep track of multiple loans and repay all of them individually before the due date. Whether it is a home loan, a car loan, an education loan, or even a personal loan, it can be a tedious job to keep track of all the monthly installments.

Each loan has its own set of terms, interest rates, and repayment schedules, and this can lead to mismanagement of the loans and also the risk of defaulting on payments. However, there is a way to give one freedom from this misery of financial mismanagement by consolidating multiple loans into a single payment.

Here we will help you understand how one can consolidate their loans to untangle their financial situation. 

Benefits of consolidating loans

Before diving into how you can consolidate your loans, here are 4 reasons why it makes sense to consolidate multiple loans into one —

• Simplified Management: Keeping track of several loan accounts can be a backbreaking task, and the consolidation of these loans into one account not only reduces paperwork but also simplifies bill payments, making the process more efficient.
• Lower Interest Rates: Consolidating multiple loans can lead you to qualify for a reduction in the overall interest rate compared to the individual rates on each loan, resulting in considerable savings throughout the loan period.
• Reduced Monthly Payments: By combining loans, one can have a longer repayment term, which can in turn lower their monthly payments. This means less financial strain and easy management of their financial obligations.
• Risk of Default and Reduced Credit Score: Maintaining multiple loans can negatively impact one's credit score or increase the risk of defaulting if one fails to make timely payments, which can have long-term repercussions on one's financial stability. Consolidation helps reduce these risks by making payments simple and also reducing the chances of missing any payments.

How to consolidate multiple loans into one payment

Now that you know why it makes sense to consolidate multiple loans into one, here's how you can consolidate multiple loans into one payment—

• Assess Current Debts: Start by compiling information on all of your current debts, including the outstanding balances, interest rates, and repayment terms. This step will help assess your current financial situation, which in turn will help you determine the best loan consolidation option.
• Explore Consolidation Options: One can explore various consolidation options in the market, with each having its pros and cons. Some of the common methods include credit cards with balance transfers, personal loans, home equity loans, credit lines, and debt reduction programmes offered by banks and NBFCs.
• Compare Interest Rates and Terms: Pay close attention to interest rates and repayment periods that are lower than your average rate of the existing debt while considering consolidation options. This will possibly help you save more money throughout the repayment term. Also taking into account other factors such as fees, repayment terms, and any potential penalties for early repayment.
• Apply for a Consolidation Loan: Once you decide which type of consolidation best suits your requirements — personal loan, home loan overdraft, gold loan, loan against property, etc — and complete the application process by providing the required documents to the lender, including your employment history, proof of income, and details on any outstanding loans.
• Use the Consolidation Loan to Pay Off Existing Debts: After the loan has been authorised, use the funds to pay off all of your existing debts, simplifying your debt situation and leaving you to deal with just one loan moving forward.
• Create a Budget and Payment Plan: After your debts have been consolidated, create a budget outlining your monthly income and spending, allocating a portion of your income towards your consolidated loan payment. To prevent missing deadlines and paying late penalties, consider establishing automated payments.
• Avoid Taking on New Debt: Avoid the accumulation of new debt while repaying the consolidation loan to maximise benefits from debt consolidation.