YOUR MONEY: Four Tips for a Successful Debt Consolidation Plan

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To consolidate debt, you should take a new loan with a lower interest rate, longer maturity and no prepayment or pre-closing fees.To consolidate debt, you should take a new loan with a lower interest rate, longer maturity and no prepayment or pre-closing fees.

People take out loans to meet their short and long term financial goals, with the expectation that they will pay off the debt in the future. While many of them can get it done on time, some fail and their contributions snowball their credit ratings. Here are a few points to keep in mind when planning your debt consolidation.

Determine target debts
Divide your loans first based on interest rates. Long-term high-interest debt may be high on your priority list, while short-term low-interest debt may go down. Debts such as personal loans, credit card fees, and so on may top the list, while low-interest loans such as home loans, car loans, etc., may be lower. You can also focus on consolidating only those loans that are at the top of your list.

Estimate prepayment, expenses before closing
Some lending products, such as personal loans, may charge prepayment penalties or pre-closing fees if you repay all or part of them before your scheduled tenure. Check the amount you will have to pay if you combine these debt products, and also consider the other participants in terms of, say, pre-closing timing. If the prepayment / closure penalties are less than the overall expected interest rate saved by debt consolidation, continue.

Choose a long term loan with low interest rates
To consolidate debt, you should take a new loan with a lower interest rate, longer maturity and no prepayment or pre-closing fees. If you have an existing home loan with a good track record of repayments, you can apply for a home loan top-up to consolidate other debts. If this is not possible, taking a securitized loan, such as a home loan, which usually comes with a low interest rate, long maturity, high loan capacity and low processing fees or minimal or zero prepayment fees, can help consolidate your existing debts. Other viable options might be a gold loan or a fixed deposit loan if the approved loan amount can cover your other problem debts. Taking an unsecured loan as a debt consolidation tool makes sense if the applicable interest rate is lower than the loans you want to repay with it.

Prefer a new loan with a low cost
If all of your loans are from the same bank, check the option of obtaining a single large loan to close your existing debts. You can also discuss lending fees with your bank. If you have multiple debts from different banks, first get approval for a new loan from the cheapest lender and then use that fund to pay off all existing loans.

Complete the repayment period according to your financial goals. However, it is better to pay off the loans as soon as possible, thereby saving on interest payments and getting free from debt. Loan consolidation is a smart way to manage your debt, but it does not in any way get you out of debt unless you pay off the consolidated loan.

The writer is the CEO of BankBazaar.com.

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