Nowadays, managing finances in a fast-paced world can be a daunting task especially, when faced with multiple debts from different sources. Debt consolidation is a viable solution. It offers a way to simplify and streamline debt repayment and provides individuals with an opportunity to get their financial lives under control.
Before applying for a debt consolidation loan it is important for individuals to understand its essence, types, and benefits to achieve their financial goals.
What is debt consolidation?
Debt consolidation refers to taking a fresh single loan to pay off multiple existing loans. Individuals can consolidate their debts using a home equity loan, personal loan, or balance-transfer credit card. With a debt consolidation loan against property, one can enjoy lower interest rates, reduce their monthly payments and simplify their financial commitments into a single payment.
How does debt consolidation work?
Debt consolidation is a simple three-step procedure:
- Apply for a new loan.
- Utilise this new loan to settle existing debts.
- Repay the recently acquired loan.
What are the different types of loans for debt consolidation?
Individuals can choose from two types of debt consolidation loans, which are as follows –
- Secured loans – These include assets like loans against property providing security.
- Unsecured loans – These include personal loans which are not backed by assets.
What are the benefits of debt consolidation?
The following are the benefits individuals get by choosing to consolidate their debts:
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Potential monthly payment reduction
Consolidating debt typically leads to a decrease in the total monthly payment by spreading future payments over a new, and sometimes extended loan term. With extended repayment tenures and lower interest rates, borrowers can benefit from lower EMIs. This reduction in monthly instalments alleviates the financial burden, making it more manageable.
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Simplifies financial management
Consolidating several debts into one loan reduces the hassle of managing multiple payments and varying interest rates. It improves an individual’s credit by reducing the risk of late or missed payments. Moreover, it provides a clear timeline of when the individual will be debt-free.
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Potential for faster debt repayment
With a lower interest rate for debt consolidation, individuals can consider making additional payments using the money saved each month. This approach can help them pay off the debt fast, resulting in significant interest savings.
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Possibility of lower interest rates
Debt consolidation loans offer the potential to lower the overall interest rate, especially if the credit scores of the individual have improved since the initial loan applications. To make sure one gets the best possible interest rate, compare different lenders and choose those that provide a personal loan prequalification procedure.
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Potential credit score improvement
By consolidating all EMIs into one, borrowers reduce the risk of missing payments due to oversight or other commitments. This positive practice can contribute to improving their credit score over time.
What are the tax benefits on loan against property for debt consolidation?
Here are the tax benefits individuals can avail through a loan against property for debt consolidation:
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Section 24(B)
Under this section, individuals can avail deductions of up to Rs.2 lakh, provided they use their loan against property amount to finance the purchase of a new residential house. The interest payments on the loan are eligible for tax deductions.
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Section 37(1)
If individuals have expenses related to their business operations that do not fall under the category of capital or personal expenses, they can include them in their income or loss statement to gain tax benefits.
What are the eligibility criteria to apply for a loan against property for debt consolidation?
The following is the loan against property eligibility criteria for debt consolidation:
Salaried individuals
- Individual’s age should be within the range of 28 to 58 years.
- An employee of a private/public/multinational organisation.
- Minimum work experience of 3+ years.
Self-employed individuals
- Individual’s age should be between 25 and 70 years.
- Make sure have a regular, verifiable source of income.
- Minimum business vintage of 5+ years in the current enterprise.
What are the documents required to apply for debt consolidation loans?
To apply for a debt consolidation loan individuals have to provide the following documents:
Salaried and professional borrowers
- Address Proof – Aadhaar card, utility bill, passport copy,
- Identity Proof – Aadhaar card, PAN card, voter ID card, driver’s licence, etc
- Employment Proof – Last 3 months’ pay slip, and bank account statements
- Income Tax Returns
- Property papers
Self-employed borrowers
- Address Proof – Aadhaar card, utility bill, passport copy,
- Identity Proof – Aadhaar card, PAN card, voter ID card, driver’s licence, etc
- Bank account statements for the last 6 months and financial statements such as Balance Sheet, and P&L Statements
- Business proof documents like partnership agreements, registration certificates, etc.
- Income Tax Returns
- Property papers
Easy Way: How to apply for a loan against property for debt consolidation?
An individual has to follow the below step-by-step procedure to apply for a loan against property for debt consolidation:
Step 1: First of all visit the official website of a preferred lender
Step 2: Go to the ‘Loans’ section and choose the ‘Loan against property’ option
Step 3: Check the eligibility criteria and then click on ‘Confirm’
Step 4: After this, click on the ‘online application form’ and fill out personal details.
Step 5: Choose the property location and provide income and annual turnover details
Step 6: Double-check the application form as well as supporting documents
Step 7: Click on ‘Submit’ and your application process will be completed
After completion, the lender will contact the borrower to complete the rest of the process which includes document and property verification.
Some financial institutions provide pre-approved offers to existing borrowers on various financial products like loans against property, and home loans, depending on their credibility. These offers speed up the property loan application process. Individuals can check their pre-approved offers online by entering their name and contact details on the lender’s website.
In conclusion, opting for a debt consolidation loan is a good idea for individuals with multiple high-interest loans. However, consolidating debts is viable only if the credit score of an individual improves, enabling a lower interest rate. Without an improved score, debt consolidation may not be the best choice. Furthermore, with this type of loan, borrowers will be able to pay less interest and come out of the debt trap sooner.
