Here’s how you can consolidate your existing loans

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The process of availing a loan has evolved significantly in the past few years, with easy and digital processes available that not only enables quicker disbursal but provides maximum convenience for borrowers. Today, availing loans is not restricted to just financing big-ticket expenses like buying a house or a car or funding children's education. As a result, increasing number of people are availing loans to finance their lifestyle too and are then saddled with multiple EMIs at wide-ranging rates with very little to spare for investments and their overall financial security.

If you are in a similar situation, the best way to come out of it is to consolidate your existing debt into a single loan at a low-interest rate, longer tenure and other favourable terms and conditions. Additionally, this will also save you from the hassle of tracking multiple EMIs, due dates, etc. Here is how you may go about it:

Step 1: Figure out the amount you need

As a first step, find out your total outstanding debt and then, subtract from it the amount that you can arrange by redeeming your existing investments. Prefer low-yield investments like bank fixed deposits or debt funds for this purpose as their rate of returns are likely to be lower than the loan rates.

Step 2: Find the credit options

Once you know the loan amount, it's time to find out the best loan type based on their interest rates, tenure, etc. Here are your options:

Personal loan: The fast disbursal process, affordable interest rates and flexible tenures of personal loans make them the most popular debt consolidation instrument, especially among credit card holders. Lenders charge anywhere from 11% - 24% p.a., depending on your income, credit score and employer. Their tenures can go up to 5 years while the disbursal is usually completed within seven days. Existing personal loan borrowers can also try the personal loan balance transfer option to transfer their loan to another lender at lower interest rate, longer tenure while availing extra funds to pay off other costlier debts.

Loan against property: Loan against property (LAP) is granted against the mortgage of residential and commercial properties. Their interest rates can be as low as 9.4% p.a. while the loan tenure can go up to 15 years. The loan amount too can be as high as Rs 7.5 crore, usually ranging between 50 to 65% of your property value. Your age and repayment capacity too would be considered while sanctioning your loan amount. Thus, for those who own a property but don't have an existing home loan, LAP would be the best debt consolidation option considering their long tenure, low-interest rates and higher loan amount.

Top-up loan: A top-up loan is offered to existing home loan borrowers only. Although their lending rates are usually 100 bps higher than home loan rates, some lenders charge the same interest rates as home loans. This makes them probably the cheapest credit option for existing home loan borrowers. The loan amount can go up to Rs 15 lakh depending on your repayment capacity and property value while the loan tenure can go up to 20 years depending on the residual tenure of your original home loan.

Loan against securities: Loan against securities is an overdraft facility set against the value of your securities. Lenders lend up to 85% of the value of your securities depending on their type. Interest rates usually range upwards of 11% p.a. on the amount drawn. It is suitable for those with sizeable long-term investments in the form of shares, equity mutual funds, insurance policies, etc. as they can utilise them for low-cost funds without compromising their long-term goal.

Step 4: Check your credit report before making loan application

Lenders usually consider credit scores of 750 and above as good ones. Checking your credit report before making the loan application will allow you to know your current credit score, detect errors or frauds in your credit report and take required corrective actions. Fetching your credit report from online lending marketplaces and credit bureaus will also help in getting customised loan offers through them on the basis of your credit score. Compare all loan options available to you from a lending marketplace to get the best deal.

Step 5: Prioritise prepayments of older loans

Once you have availed the new loan, prefer paying off unsecured loans like personal loans, loan against credit card, etc. before paying secured ones like home loans, car loans, etc. Unsecured loans not only have higher interest rates, prepaying them off first will improve your credit mix, i.e. ratio of secured and unsecured loans, which will improve your credit score.

Step 6: Ensure regular repayment of new loan

After replacing your older loans with a new loan, ensure its regular repayment to avoid penalties and conserve your credit score. If required, set a standing instruction in your primary savings account to automatically deduct the EMI on a pre-specified date.

This piece is authored by Naveen Kukreja, CEO& Co-founder, Paisabazaar.com

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