Top mistakes to avoid when applying for a debt consolidation loan

If you are someone who is juggling several debts, especially those pesky credit card bills, you might find yourself considering debt consolidation loans as a way to ease the burden. Debt consolidation loans reduces the burden of paying multiple EMIs and is well suited for people whose ongoing debts have high interest rates. In this article, we will explain how to choose the right lender and highlight the common mistakes to avoid.

What is a debt consolidation loan?
 

A debt consolidation loan can be defined as a single loan a person can take to repay several existing debts. Simply put, in place of paying multiple EMIs, each with a different due date, and varying interest rate, you can choose to pay one EMI to a single lender. Customers opt for a debt consolidation loan in India, to reduce the overall cost of interest and to ease repayment.  

Common Mistakes While Applying for Debt Consolidation Loan In India
 

Listed under are a few common factors that can be easily overlooked. They are:

1. Not Checking Eligibility Criteria
 

Most borrowers skip checking their debt consolidation loan eligibility before initiating the process.

Typical eligibility criteria for lenders in India are:

• Indian Citizenship
• Age
• Income Proof
• Credit Score
• Credit Repayment History
• Current Debt to Income Ratio

Not meeting any of these mandatory requirements could lead to loan application rejection. Several rejections may impact your credit score negatively. It is recommended that all borrowers must fulfil these criteria before applying.

2. Opting for Lower EMIs and Ignoring Cost of Entire Loan
 

One of the most common mistakes made by borrowers is to assume a lower EMI means the loan is cheaper. Factors to consider while applying for a debt consolidation loan in India are:

• Loan Tenure
• Rate of Interest
• Repayment Charges
• Late Payment Fee
• Processing Fee
• Foreclosure Charges 

A longer tenure typically means the cost of loan is higher even if the EMI is low. It is imperative to compare your current interest cost with the full cost of the debt consolidated loan.

3. Applying to Multiple Lenders at the Same Time
 

Borrowers oftentimes apply to several lenders in a bid to understand their options, interest rates and cost of loan. This move ends up triggering several hard inquiries in your credit history causing a direct impact on your overall credit score. Too many credit inquiries in a short term can be perceived as a red flag for lenders.

Borrowers are recommended to compare rates and products before making hard inquires to avoid credit score reduction. To speed up the process, look for lenders that provide digital approvals on instant debt consolidation loans, check eligibility before proceeding with completing documentation and know your customer formalities to avoid rejection.

4. Not Comparing Different Lenders
 

It is ideal for borrowers to compare products across various lenders that offer debt consolidation loan. Typically, lenders like banks and non-banking financial companies (NBFC) offer personal loans that can be used to consolidate debt. Each lender has its set of unique rules and eligibility criteria. By skipping the step of product comparison, borrowers may end of choosing loans with a higher overall cost.

Listed below are points to consider while comparing credit products:

• Eligibility Criteria
• Digital Application
• Mandatory Documents
• Income proof, especially for self-employed borrowers
• Interest Rates and if they are floating or fixed
• Loan Tenure
• Monthly EMI Payment Break Up
• Processing Charges
• Early loan repayment charges

Comparing these factors will help you make informed decisions and help chose a debt consolidation loan that aligns with your current financial capacity.

5. Inadequate Debt Management and Financial Planning
 

While debt consolidation loans are a prudent way to manage debt and reduce outflow of interest payments, it is not a means to clear debt instantly. Borrowers assume debt consolidation as a single payment and underestimate its financial implications while accumulating more debt.

Borrowers are encouraged to engage in proper financial planning to ensure timely payments while reducing other credit spends for optimising debt reduction. This has a direct impact on your credit health and impacts your chances of getting loans in the future.

6. Not Checking Repayment Flexibility
 

Lenders have different policies around early closure of loans or making lump-sum part payments. It is crucial to know the lenders policy around these terms and the possible charges you may end up paying in case you choose to repay the loan earlier than intended.

What to look for:

• Lock in period, if any, before you can close the loan entirely
• Are lump- sum or part payments allowed and if they reduce the interest and tenure of the ongoing loan?
• Foreclosure and early loan repayment penalties?

Selecting lenders that allow flexibility in loan repayment and loan closure can significantly impact your finances in the long term.

Importance of Choosing a Correct Lender
 

Financial products, whether they are for credit or investment must be thoroughly researched, compared with other similar products by different lenders and most importantly, must align with your risk profile and financial goals. This inculcates financial discipline and avoids any rude surprises for the borrower later.

Let us see some crucial aspects borrowers must consider before choosing a lender:

• Eligibility criteria and mandated documents by the lender
• Competitive interest rates, zero or low processing fee, foreclosure charges and lock in periods.
• Approval windows, transparency of terms and conditions and overall reduction in consolidated interest to be paid.

These aspects are critical for ensuring that taking a debt consolidation loan is working in your favour and easing your credit burdens.

Final Words
 

Lenders such as public and private sector banks, offer personal loan as a form of debt consolidation but a select few banks also have a product called a debt consolidation of loan.

If you are looking for an instant personal loan to meet your urgent financial needs, you can avail a FIRSTmoney personal loan by IDFC FIRST Bank. You can get loan amounts up to 10 lakh and interest rates start at 9.99% p.a. with zero foreclosure charges.