How Debt Consolidation Can Save Your Money

Every month comes with multiple bills and financial stress. Managing different lines of credit, including loans, credit card bills, and other debts, can feel overwhelming due to the varying due dates and conditions. An easier management strategy exists in the form of debt consolidation. It refers to merging all the existing debts into a single payment schedule.

Debt consolidation has a significant positive impact on people’s finances. It brings better financial stability, ensures timely payments, helps save money on high rates and late charges, and further improves credit scores. A 2023 TransUnion report indicated that 60% of borrowers who consolidated their debt saw a credit score improvement within six months. In this article, we shall explore how debt consolidation works and how it helps you save money on your loans. We shall further discuss expert tips on saving money with debt consolidation loans in India. Join us!

What is Debt Consolidation?

Debt consolidation is a management strategy of bringing all existing debts into one loan. This new debt consolidation loan allows you to pay off all lines of credit and simplify your monthly schedule by replacing multiple EMIs with a single payment. A key feature of a debt consolidation loan that attracts borrowers is the lower interest rate.

Popular Ways of Debt Consolidation

There are various ways to combine debt, including the following: 

• Debt Consolidation Loan: You can find loans with lower interest rates and better terms and conditions to close your existing personal loans. These are unique loan products designed to help borrowers consolidate their loans. 

• Credit Card Balance Transfer: In case your current credit cards do not offer a high credit limit or if credit cards with lower interest rates are available to you, you can consider credit card balance transfer. It will enable you to move the balance from your current credit card to a new one. Moreover, you can avail of an introductory period with zero APR when transferring your balance to specific providers, which further helps you save money on associated charges. 

• Home Equity Loan: Homeowners who have accumulated equity over the years by paying down the mortgage can apply for a home equity loan. This type of loan becomes secured in nature as the homeowner’s equity works as collateral against the new loan. Naturally, interest rates will be lower than those of unsecured loans.

An Example of Debt Consolidation

Meet Mr. Raj. He had a total debt amounting to ₹15,00,000 with an 18% annual interest rate and a 60-month tenure. Even after making regular monthly payments of ₹38,090, most of it went into interest payments and not towards the principal borrowed amount. Realising that it would take him years and cost him significantly in interest to pay off the debt, he began his hunt for an alternative.

He came across debt consolidation loans and saw a personal loan with a 12% interest rate, which was way lower than what he was paying previously. He then chose to opt for a 12% interest rate and was able to reduce his monthly payment to ₹33,366. He could also opt for a longer tenure to reduce the EMI further.

With the 18% interest rate, Mr. Raj would have paid a total of ₹22,85,408 in the next 5 years. However, the new 12% interest rate brought the total payable amount to ₹20,02,000, saving him ₹2,83,408. 

If you have high-interest debt, consolidating it into a personal loan can help. It can save your money and lead to financial stability faster.

Ways Debt Consolidation Can Save Your  Money

Borrowers primarily choose to apply for debt consolidation loans in India to save money. Here is how it helps:

1. Lower Interest Rates

Credit cards often carry high interest rates, sometimes going up to 25-30%. As you decide to consolidate your debt with a loan offering lower interest rates than your current one, you will spend less money on interest payments over time.

For example, if you owe ₹5,00,000 on your credit card that charges an 18% interest rate, you could be paying ₹90,000 each year just in interest. Switching to a loan with a 12% rate for debt consolidation can cut your interest payments to ₹60,000 each year. That means you can save ₹30,000 annually!

2. Lower Monthly Payments

A consolidation loan can lower your monthly EMI. It does this by spreading your debt over a longer term. This means you’ll have more flexibility in your budget.

3. Avoiding Late Fees and Penalties

Missing payments on several debts can result in considerable late fees and penalties. This increases the total cost of your debt. With one consolidated loan, you only have one due date to remember, reducing the risk of late payments and thus avoiding penalties.

How Debt Consolidation Helps Improve Your Credit Score

Some worry that an instant debt consolidation loan will harm their credit score. When managed effectively, it can enhance your score. Here’s how:

1. Reduces Credit Utilisation Ratio

Your credit utilisation ratio shows how much credit you use compared to your total limit. Lenders might consider a high credit utilisation ratio a potential risk, as it indicates poor financial management on the borrower’s end, leading to a lower credit score. A debt consolidation loan can help you pay off high credit card balances, lowering your utilisation rate. This, in turn, will allow you to boost your credit score.

2. Easier to Make On-Time Payments

Since you only have one monthly payment after consolidating all loans and credits, it will become easier to stay on top of your finances. There will be fewer chances of you missing the payment date. On-time payments are the most significant factor in your credit score since a major percentage (35%) of the score is determined by the borrower’s ability to adhere to the payment schedule.

3. Diversifies Your Credit Mix

Credit mix accounts for 10% of the credit score. Diversifying your credit mix and, hence, your credit score is possible by a combination of credit types, like credit cards, personal loans, and mortgages. A consolidation loan introduces an installment loan into your credit report, which enhances your credit mix.

Who Can Gain the Most from Debt Consolidation?

Debt consolidation loans are great options if:

• You have multiple high-interest debts (like credit cards, personal loans, or payday loans).

• You are struggling to keep up with multiple due dates and payments.

• You have a good credit score, usually 650 or higher, which increases the chances of getting approval.

• You are committed to financial discipline and won’t take on new debt after consolidating.

Tips for Maximising Savings with Debt Consolidation

Here are some smart ways to make the most out of your consolidation loan:

• Compare Lenders: Consider various products provided by other lenders and determine the lowest possible interest for debt consolidation. Additionally, check for debt consolidation loans with the least possible accompanying fees and optimal borrowing terms.
• Choose Fixed Interest Rates: Select a fixed-rate loan for consistent and reliable monthly payments, and avoid the impact of increased market rates.
• Pay More When You Can: Making more payments than scheduled will help you pay off debt quicker and cut down on the overall interest costs. That said, be careful of any prepayment penalties on the new debt consolidation loan.

Important Factors to Consider

Debt consolidation loans offer many advantages; however, you must be aware of the potential risks & considerations:

• Upfront Charges: Some consolidation loans have upfront charges, adding to the cost of borrowing.
• Minor Credit Score Blip: When you request this new line of credit, it could cause a hard pull on your credit report and hit your credit score.
• Extended Repayment Period: The attempt at lowering the monthly cost of money can be used to lengthen the repayment period, thus prolonging the interest payoff period as well.
• Loss of Collateral: While consolidating debt through a secured loan, loss of collateral is a potential risk in the event of default.

Why Choose My Mudra for Debt Consolidation?

Choosing the right lender is crucial when it comes to debt consolidation loans. Here’s why My Mudra is a top choice:

• Quick Online Application: Apply for a debt consolidation loan online at your convenience.
• Instant Debt Consolidation Loan: Enjoy a fast approval process with minimal paperwork and zero hassle.
• Low Interest Rates: Access debt consolidation loans at low interest rates.
• Flexible Repayment Terms: Get to choose a repayment plan that fits your budget.
• No Hidden Fees: Experience complete transparency with no surprises.

With My Mudra, you have a reliable financial partner. Our expert team will help you save money and guide you to financial freedom.

Conclusion

Debt management need not be a difficult task if you have the right strategy up your sleeve. When juggling multiple due dates and EMIs makes life more stressful, consider debt consolidation. A good debt consolidation plan helps you escape the debt cycle and enter an enhanced payment schedule that works for you.