Consumers struggling with multiple debts can reduce their debt burden and overall interest costs by consolidating their debts under a single loan availed at a lower interest rate. Although there are multiple loan options to consolidate their outstanding dues, borrowers usually select personal loans for debt consolidation due to the following reasons:
Interest cost savings
The interest rates offered on personal loan by private sector lenders usually start from 10.49% p.a., with some public sector banks offering lower personal loan interest rates. Being unsecured in nature, the personal loan rates offered by banks and non-banking financial companies (NBFCs) are usually higher than secured loan options. However, the interest rates on personal loans are significantly lower than credit card finance charges, which are usually 40% p.a. or above. For example, the SBI Personal Loan interest rates start from 11.05% p.a., which is substantially lower than the finance charges levied by various credit card issuers.
Therefore, borrowers who are struggling to manage the debt on their multiple credit cards or have availed loans at higher interest rates may consider consolidating them using personal loans to reduce their overall interest cost burden. As personal loan tenures usually range between 1 and 5 years, choosing personal loans to pay-off your credit card dues can also help reduce your monthly repayment burden.
Faster loan processing and disbursal
Lenders usually take less time to disburse the loan amount for personal loans as compared to most of its secured loan alternatives. Lenders offering secured loans require more time to perform due diligence on the pledged asset. In comparison, personal loans are approved based on the loan applicants’ credit profiles. With the integration of digital infrastructure in the lending process, many lenders can now provide personal loans through online mode, thereby decreasing their turnaround time for processing the loan applications.
Many lenders also offer pre-approved personal loan to their select existing customers depending on their credit profiles. Such offers usually come with instant or same-day loan disbursals. As banks/NBFCs offering these loans already possess the KYC details of their existing customers, loan applicants need not submit additional documents for availing these loans. The time saved by lenders on document verification ensures faster loan processing, thereby allowing them to disburse the personal loan amount within a few minutes of receiving your loan application.
No need for collateral/security
The unsecured nature of personal loans is another reason why most existing borrowers choose this credit facility to consolidate their debts. Those seeking to consolidate their existing debts can also use secured loan options like loan against property. However, those opting for secured loans need to pledge their asset(s) as collateral/security. The lender can auction the pledged collateral to recoup its losses in case the borrower defaults on his/her loan. However, prospective applicants choosing personal loans to consolidate their existing debts need not worry about losing their assets.
Requires less paperwork
Personal loans involve lesser paperwork, compared to other secured loan options, as they are not backed by any underlying asset. However, its alternatives such as loan against property or loan against securities have underlying assets as collateral/security. Hence, the required list of documents for secured loans are more extensive as compared to personal loans. Lenders usually require their personal loan applicants to submit documents for proof of identity, income and address. Some banks/NBFCs also offer personal loans, usually to their select existing customers, without documentation. Lenders offering such personal loans already have their customers’ required KYC details, thus allowing them to skip the document collection and verification process thereby ensuring faster loan disbursal.
(A Space Marketing Feature)