What is a Debt Consolidation Loan? How Does it Work?

Multiple creditors and numerous payments become too difficult to track and can lead to a fall out impacting the creditworthiness. In such circumstances, a debt consolidation loan becomes very handy. It helps to consolidate – bring together – multiple smaller debts, by paying them off through one new loan.

A debt consolidation strategy allows a person to use a new, favourable loan (a lower rate of interest or lesser monthly payments or both) to pay off multiple liabilities such as several smaller loans, credit card bills, overdraft balances, etc.

Typically, these are of two types:

1. Secured loan: These loans are protected against collateral such as real estate, vehicle, gold, insurance policy, equity, etc. which can be easily converted to cash. A secured loan can be used to combine several unsecured debts.
2. Unsecured loan: An unsecured loan is not secured against collateral and is solely issued basis the credit history and CIBIL score of a person.

Better the solidity of the collateral, lower is the interest rate of the loan, but if the CIBIL score is low, even good collateral will not be able to fetch lower interest rates.

A bank, financial institution, credit card company or a credit union can issue a debt consolidation loan to a person who meets the below eligibility criteria:

1. Age of the person should be 21 to 60 years
2. The monthly salary of the candidate should be at least ₹15,000. However, this varies per bank, city, and other factors
3. Applicant must be residing in the city of application since a year
4. Applicant should hold a minimum working experience of 2 years
5. All documents should be fair, true and duly submitted. The types of documents include – address proof, ID proof, bank statement, salary proof, etc.
6. A person must have a good CIBIL score – ideally 620 above, though some exceptions can be made by lenders here

Applying for a debt consolidation loan is simple if one meets the eligibility. The process includes:

1. Analyzing the official website of institutions offering debt consolidation loans
2. Conducting a comparative analysis based on interest rates, payment terms, etc. and selecting the ideal one
3. Filling the form and applying for the loan from the chosen lender
4. Submitting all necessary documents required
5. Upon loan approval, the sum is deposited in the bank account to be used by the borrower for the said purpose.

Overall, a debt consolidation loan appears as an attractive financial move, though it must be opted for with utmost caution and after deep analysis of all advantages and disadvantages.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.