The rising lifestyle aspirations and improved credit access are leading consumers towards availing multiple credit facilities to meet their discretionary spends. Due to this, many consumers are being burdened under high-interest debt, leaving them with little-to-no amount to save or invest for their crucial financial goals. Borrowers spiralling under multiple debts can come out of it by consolidating them under a single loan availed at a lower interest rate. Doing so will reduce their overall interest cost and make it easier for them to keep a track of their multiple debt payments.
While there are multiple credit options for consolidating debts, personal loan is usually the preferred option. Here’s why.
Generates significant savings in interest cost
The interest rate on a personal loan usually starts from 10.50% p.a. and is lower than credit card finance charges, which usually are 40% p.a. onwards. Thus, consumers having dues on multiple credit cards should consider availing personal loans for consolidating their credit cards’ outstanding balances. Doing so will reduce the borrowers’ overall interest cost. Keeping a track on bill payments will also become easier as instead of making multiple credit card payments, borrowers will now be making single payment every month.
Those having a hard time paying their credit card bills due to financial contingencies and are unable to convert their dues into EMIs can lower their total interest cost by availing a personal loan to consolidate their multiple credit cards dues.
Has quick approval and disbursal process
The loan approval and disbursal process of a personal loan is faster than that of a secured loan. In case of secured loans, banks and NBFCs may take their time in verifying the pledged collateral. However, personal loans are sanctioned primarily on the basis of the borrower’s credit profile. Furthermore, the adoption of digital infrastructure in lending has allowed lenders to offer personal loans online with an end-to-end onboarding process, which has further reduced the lenders’ turnaround time for loan approval and disbursal. For instance, HDFC Bank claims that it can provide its pre-approved customers with HDFC personal loan within 10 seconds of their loan application. For other personal loan applicants, the bank might take up to four business days to disburse the loan.
Requires no collateral or security
Personal loans do not require collateral or security; and therefore, are preferred for debt consolidation by most borrowers. Secured loans are sanctioned against collateral, which lenders can seize in case of loan default. However, in case of personal loans no such risk is involved.
Involves minimal paperwork
Secured loans like loan against property, loan against securities, etc. are backed by collateral as security. Therefore, the documentation required for these loans is more extensive than the documentation required for an unsecured loan like personal loan. Lenders usually require their personal loan applicants to furnish proof of their identity, address, income and existing loan obligations (if any) at the time of loan application.
Some lenders also offer personal loans without any paperwork but only to a select group of their existing customers. Such personal loan offers are usually pre-approved in nature and are offered to existing customers based on their credit profiles.