The general employment scenario has changed in the modern times. During the decades of 70-80s, more and more individuals preferred being employed either with the government or the public sector companies. With the globalization of the Indian economy in the 1990s, employment with the private sector like software and other service industries such as the BPOs and KPOs gained popularity. However, with the turn of the century, more and more youngsters and the old alike, prefer to go the entrepreneurial route and be self-employed.

Although the journey of an entrepreneur is filled with lots of exciting twists and turns, the inflow of income may be irregular, at least till the business finds a strong base. However, during this time, the need for funds for a self-employed individual may be as regular or even may be on the higher end, as he tries to meet the needs of the business.

Taking multiple debts or using multiple credit cards to meet various needs of an individual is commonplace. However, at certain times, dealing with numerous debts or cards may become taxing for an individual. Right from keeping up with the dates for EMIs to different rates of interest, anything may end up being the cause of default on loans/ credit cards.

What is a Debt Consolidation Loan?

As the name conveys, debt consolidation loans are those loans that help in consolidating multiple debts into a single one. These loans are so designed that debts with varying rate of interest and dates of repayment are consolidated into a single loan with a fixed rate of interest. This makes it easier for you to track and repay your loans at the earliest. This is also helpful in case you have bad credit.

Who Should Consider Debt Consolidation Loans?

Debt consolidation loans can be suitable for the individuals who:

  • Are finding difficulties in repaying multiple debts

  • Are servicing multiple debts with high rates of interest

  • Find it difficult to keep up with the schedule of repayments

Additional Reading: Too Many Loans? Debt Consolidation Loan Can Be a Solution

How does a Debt Consolidation Loan Work?

A debt consolidation loan is not a special type of loa; it falls under the category of a personal loan. You can avail a single loan which is the total of all your outstanding loans including credit card outstanding amount. Once you get an approval and disbursal on this kind of a loan, you can pay off all your existing loans and outstanding, after which you will have to serve only one loan: the loan availed for debt consolidation.

What are the Advantages of a Debt Consolidation Loan?

  • As the debt consolidation loan is also a personal loan, the terms and conditions attached to it are fairly simple and easy to understand for a common man.

  • A debt consolidation loan works well for a moderate amount of debt. If the amount of debt is in excess to the normal amounts available through a personal loan, it may not work.

  • It helps you consolidate existing multiple debts into a single loan.

  • Debt consolidation loan helps you streamline your finances and bills.

  • When used effectively, a debt consolidation loan would help you lower your cost of debt.

  • A new loan will allow you to make monthly payment that is in line with your current financial status.

  • Debt Consolidation Loan doesn't call for furnishing a collateral.

What are the Various Factors to be Kept In Mind while Going in For a Debt Consolidation Loan?

Though there are many advantages of going in for a Debt Consolidation Loan, there are certain points that need to be kept in mind. It is not a matter of just going in for a consolidated loan in place of many smaller loans. It pays to keep in mind the following factors:

  • Lower Rate of Interest

The Debt Consolidation Loan should have a lower rate of interest than your earlier loans.

For Ex: If you look to pay off a home loan with a Personal Loan, it may not work to your advantage. While on the other hand, a personal loan will be beneficial to pay off your credit card outstanding.

  • Processing Charges Payable

Take into account the processing charges that you would need to pay when you consolidate multiple loans. Some existing loans may incur a prepayment penalty and you would need to pay a processing charge on the fresh loan. You should be at an advantage after paying the charges. If not, the purpose of going in for a consolidated loan will be defeated.

  • Check the Tenure of Existing Loans

The tenure of the existing loans plays a big part in making the decision about consolidating all your loans. If there are just a few months to a year left out to finish your loans, consolidating them into a single one may not serve the purpose as you would be unnecessarily paying the prepayment charges.

  • Credit Score

Even though availing a debt consolidation loan can be one of the ways of improving your credit score, it also may be the reason why you can end up with higher rates of interest. You would need to pay attention to your existing credit score before applying for a debt consolidation loan. With a low credit score, getting loans at a low rate of interest might prove tougher.

Additional Reading: Personal Loan for Debt Consolidation for People with Bad Credit

  • Ensuing EMI and Repayment Term

As you are consolidating many of your existing loans into a single one, you would need to pay attention to your ensuing EMI and repayment term. Debt Consolidation is done with an aim of lessening the burden of EMIs. However, if the ensuing EMI proves to be higher than the existing ones and with a shorter term, then you may end up in a bigger financial trouble.

What are the Options Available for Self Employed Individuals for Debt Consolidation?

Lenders are gradually opening up to the credit needs of a self-employed individuals.  However, a sound credit score and a good income to match up to the loan being applied for would be a mandatory requirement for self-employed individuals too. The options that could be explored by a self-employed individual are.

Debt Consolidation Loans from Banks

Self-employed individuals can approach banks to fund their debt consolidation needs. But the approval of a personal loan will be dependent on the credit score and the income proof submitted by the applicant. Some of the banks that allow debt consolidation loans are Citibank, ICICI Bank, HDFC Bank, etc.

Non-Banking Finance Companies

Many NBFCs like Bajaj Finserv allow Debt Consolidation Loans of up to Rs 25 lakhs. However, the interest charged may be a bit higher than the banks.

Finntech Lenders

Many fintech and peer to peer lenders have come up with algorithms and credit rating methodologies that allow them to lend to self-employed and other individuals with no credit score. These lenders are more open about lending for debt consolidation needs. Some of the popular lenders that allow debt consolidation loans are Faircent, i2iFunding, and Lendenclub.

End Note

Debt consolidation loans works well to consolidate all your debts into one and there are many advantages of doing so. However, you must take into account you are responsible to pay all the EMIs for the debt consolidation loan on time to ensure that your credit score is not affected.