Understanding the Costs Associated with Debt Consolidation Loans

Are you planning to take a debt consolidation loan? Generally, I suggest people opt for a debt consolidation option because it offers a lower interest rate for all their loans by rolling them into a single account. This makes the overall process of paying off your debts easier. 

I feel this is a great financial strategy for paying back your debts within a fixed tenure with a far more manageable EMI. However, you must have a good credit score to get a consolidated debt. At the same time, while it aims to reduce your expenses, here are some costs associated with debt consolidation that you should keep in mind.

Do not worry; I will guide you through some of the expenses you might incur as you take on a consolidated debt to pay off your other loans. There are two broad cost factors that you must consider.

  • Your Credit Score And History

Whenever you take a loan, your creditor and lender will look at your credit history to gauge how much of a risk you are to lend money to. Your creditworthiness is one of the most crucial factors determining the interest rate you receive. 

You will likely get a lower interest rate with a high credit score. To keep a good score, you must pay your dues and EMI consistently and on time. Failing to do so earns you a lower score. You need a high credit score to qualify for a consolidated debt. Hence, one of the first factors you must cover is keeping your scores high.

  • Fees and charges

If you’re taking a personal loan for your debt consolidation option, there will be certain fees that you have to keep track of. These are:

  • The processing fees for the loan application: This can be up to 4% of the total amount that you’ve borrowed.
  • Security fees: You might have to pay a security fee of Rs. 4,499 for the maintenance and upkeep of your information online. 
  • Potential bounce charges for your EMI: If your payment doesn’t go through because of an insufficient balance in your account, you will have to pay a bounce charge of around Rs. 1200.
  • Late EMI penalty: You can also incur a penalty for a late EMI. These can either be a penalty fee or higher interest rates added to the remaining EMI payable. The hike can be between 2 to 3.5%
  • Sometimes, some lenders can extract a pre-prepayment charge for early payment of EMI.
  • You will also have to pay annual maintenance charges for the borrowed amount.

Final Tips To Save Money On Debt Consolidation

Depending on the lender or bank, these approximations can differ. Further, the fees can also change depending on whether the loan type is secured or unsecured. However, in my experience, doing your due diligence early can help you save money. One of the most essential steps I recommend is fixing your credit score. Ultimately, you aim to reduce your interest rate as much as possible. 

With a high score, you are likely to get more benefits. This also involves picking a lender who can help make your repayment more manageable rather than burdensome. You can also look for interest-only EMI options where you pay the interest rate for the first few months until you get your financial bearings together. 

This does not incur any penalty, and you can manage your debts better. Now that you know the different costs you might incur with debt consolidation, you can strategise better and be free of your debts sooner.

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