Benefits of Using Personal Loan for Debt Consolidation
Due to digitization, today’s consumers have plenty of credit options at their disposal. Due to improved credit access, consumers too are increasingly turning towards these quick credit options to meet their urgent and discretionary expenses. Hence, many consumers tend to find themselves in a pile of high-interest debt.
Consumers who are in a similar situation can get out of it by consolidating their multiple loans by availing a single loan at a lower interest rate. Consolidating multiple debts into a single loan will not only reduce their interest cost but also save them from the hassle of tracking multiple EMIs, due dates, etc.
Now, there are multiple credit options for debt consolidation such as loan against property, loan against fixed deposits, gold loan, loan against securities, top up home loan, etc. However, out of all of these options, personal loans are usually preferred by the borrowers, let us know why.
Benefits of Availing Personal Loan for Debt Consolidation
Lower interest rates
Credit card interest rates (usually starting from 40% p.a.) are higher than personal loan interest rates (usually from 11.00% p.a. onwards). Hence, borrowers servicing high-interest loans and/or carrying debt on multiple credit cards should consider availing a personal loan to consolidate their outstanding credit card dues. Due to personal loan’s lower interest rates, borrowers will be able to save huge on the overall interest cost and streamline their finances better with just one EMI to pay in place of making multiple credit card payments.
Consumers who are unable to pay their credit card bills due to financial exigencies and are unable to convert their credit card bills into EMIs can also avail personal loans for debt consolidation to reduce their total interest cost.
No collateral/security required
Personal loan is the most preferred instrument for debt consolidation because it does not require collateral or security. In case of secured loans, lenders can seize the underlying collateral if the borrower defaults in repayments. However, as personal loans are unsecured, borrowers are at no risk of losing their assets in case they fail to repay the loan.
Secured loans are sanctioned against collateral. Therefore, the paperwork involved in these loans is more than the paperwork required in case of personal loans. The documents required to apply for a personal loan usually include proof of identity, proof of residence, proof of income and proof of existing loan obligations (if any).
Some lenders also offer personal loans without documentation but only to their existing customers with which they have an existing relationship. Such personal loan offers are approved on the basis of the customer’s credit profile.
Quick approval and disbursal process
Personal loans are approved and disbursed faster as compared to secured loans. In secured loans, lenders may take time to verify the pledged collateral, whereas personal loans are approved mainly on the basis of the borrower’s credit profile. Moreover, due to COVID-19 pandemic, many lenders adopted digital infrastructure for online documentation and processing of personal loans, which further enabled them to offer personal loans online with much lower turnaround time. For instance, HDFC Bank claims to disburse HDFC personal loan to its pre-approved customers within 10 seconds of making the loan application. In case of other personal loan applicants, the turnaround time for loan disbursal can go up to 4 working days.