Debt consolidation is a process where you take a loan to pay off several existing liabilities or consumer loans. It combines multiple smaller debts into a larger line of credit with favourable repayment terms. You can utilise this option to consolidate your debts such as student loans and credit card debts.

One of the most popular methods of debt consolidation is to avail an advance with a lower interest rate, flexible tenor, affordable EMI, and high loan amount. Such features allow a borrower to utilise the amount and clear existing debts without straining his finances.

However, availing a debt consolidation loan and paying off credit require a clear insight into the process. You should also note certain factors to avoid any mistake during the process. 

Let’s look at some of the mistakes you should avoid during debt consolidation.

Consolidating all existing debts – 

Consolidating every debt might put an excessive financial strain on your budget. So, pay off only the loans with a high rate of interest when consolidating so that you don’t utilise the entire limit on the new credit.

Selectively paying off these debts also helps you increase your credit score. Part or full pre-payment boosts your credit score; at the same time, you won’t exceed the recommended FOIR as you are not utilising the entire credit limit. 

Not checking your credit report – 

Your CIBIL score is an important requirement of personal loan eligibility. You should carefully check your credit report and score before applying for a debt consolidation loan. The lender may not approve a large loan amount to clear your existing credits if you have a poor credit score. Also, any mistake in your report reflects negatively whenever a lender enquires after you apply for credit.

Not selecting a good financial institution – 

You should always go for a reputed financial institution when applying for a personal loan for debt consolidation. You are likely to get attractive personal loan interest rates, flexible repayment tenor, and several other borrower-friendly features and benefits when you opt for a personal loan from such an organisation.

Companies like Bajaj Finserv offer up to Rs. 25 Lakh as Personal Loan against flexible repayment tenor, minimum documentation, and instant approval. You can get a collateral-free credit within 24 hours of application to repay existing debts. Transparent loan policy and zero hidden charges ensure you don’t pay extra for the advance.

Furthermore, Bajaj Finserv provides pre-approved offers on unsecured credits like personal loan, business loan, secured advance like home loan, and a range of other financial products. Such offers not only simplify the process of financing, but it also helps you save more time. You only need to share some essential details online to check your pre-approved offers.

Not considering the associated fees – 

A financial institution may levy certain fees for balance transfer, part or full prepayment, etc. Usually, they charge anything between 2% and 4% on part-prepayment and foreclosure. You should always consider these charges when availing a loan to consolidate your debts; these can add up to the total amount.  

Closing older accounts – 

Avoid closing the older line of credits during debt consolidation. These accounts carry more weightage as credit bureaus can analyse them to check your spending habit and determine whether you are financially responsible or not. If you close older accounts, it is likely to affect your credit rating negatively.

Consider closing high-interest, newer lines of credit first. You will save on EMIs while not paying the amount over a lengthy tenor.

Consolidating your existing debts can be beneficial if you avoid the above mentioned factors and ensure timely and proper pay-off. Closing high-interest credit lines will boost your CIBIL score, improve fixed obligation to income ratio, and make you creditworthy for future advances. With the help of a debt consolidation loan, you can pay off the credits without impacting your savings.