Connect with us

Banking

What is a Debt Consolidation Loan and How Does it Work?

Published

on

Debt Consolidation Loan

Debt consolidation is the act of clubbing all your existing loans together and paying them off as one single debt.

The biggest advantage of taking a debt consolidation loan is that you don’t have to worry about connecting with multiple vendors for repayments. There’s no need for managing multiple credit cards and the EMIs you pay are dedicated towards a single big loan.

There are some cases where you cannot apply debt consolidation. For example, you cannot take a debt consolidation loan for paying off pending EMIs for liable or secured assets (such as a home loan).

However, for unsecured loans like personal loans, education loans, and credit card dues, you can apply for a debt consolidation loan to clear them up.

Some organisations these days offer secured debt consolidation loans for individuals where they put up their property or business assets as the collateral.

Unsecured debt consolidation loans are hard to apply for and charge higher rates of interest. Most banks aren’t willing to give out individuals unsecured debt consolidation loans but there are NBFCs, fintech startups, and private organisations that disburse these loans as long as the borrower’s profile is verified and they demonstrate sufficient creditworthiness.

The best part about these loans is that the interest rates remain fixed and do not fluctuate. This means your monthly EMI repayments stay the same and don’t suddenly change, thus giving borrowers peace of mind.

Advantages of Debt Consolidation Loans

Debt Consolidation Loan

There are various reasons why you’d want to opt for a debt consolidation loan. Here’s a list of the benefits:

  • One Single Liability – It’s hard enough to keep track of multiple EMIs and repayment. Going for debt consolidation takes care of this legwork since your lender takes care of the communications. Your only duty is to make sure you make your EMI payments on time for the debt consolidation loan you applied for.
  • Lower Interest Rates – With multiple different loans, you have varying interest rates. But with a debt consolidation loan, you have to worry about a single interest rate. The payoff is lower too and it makes the monthly repayments lesser too.
  • Paperless Process – If you’re applying for a debt consolidation loan online, you’ll find that the entire process is paperless. You can file your application digitally and you’ll find that lenders disburse the amount in just a few days if you meet their borrower requirements.
  • Flexible EMI Tenure – Debt consolidation loans can have a flexible repayment tenure of anywhere between 2 years to 20 years. Self-employed individuals can get a tenure of up to 18 years while salaried individuals are liable for more.

Debt Consolidation Loans vs Debt Settlement

The key point to remember about debt consolidation loans is that they don’t completely erase all your debts. They simply club your loans together and transfer them to a single lender. As a borrower, you become responsible for making repayments to a single lender.

Debt settlement works a bit differently and aims in providing credit relief to borrowers. Here, negotiations are done with lenders to reduce the loan amount or interest rates instead of cutting down on the number of lenders by transferring the debt to an organisation.

There are many credit counselling services and organisations that help in doing debt negotiations with organisations and providing relief to borrowers, although they don’t directly give out any loans on their own.

How Does It Work?

Let’s say you’ve taken a loan of Rs 1 lac over a period of 2 years with an interest rate of 12%. And you have another loan of Rs 2 lacs which you have to clear within a year, its annual interest rate being 10%. The monthly EMI payments for each of these loans may come to around INR 5170 and INR 5830 respectively.

With a debt consolidation loan, your monthly EMI payment would amount to INR 6000 combined. However, the trade-off is that you get a longer tenure for making both the repayments on your existing debts. Instead of making multiple payments to lenders, you can now make a single EMI payment every month and end up saving money on interest. The longer tenure also gives you peace of mind as you know that you can handle your repayments a lot better. Debt consolidation gives you a favourable structure for making repayments and makes it convenient to pay off multiple small loans together by applying for a big loan.

Make sure you identify all your financial obligations and liabilities before going for this type of loan. It’s always a good idea to talk to an advisor before applying for debt consolidation if you’re not sure whether or not to go for one based on your financial circumstances.

What Are The Eligibility Requirements?

If it’s your first time applying for a debt consolidation loan, you’re going to have to make sure your KYC documents are with you. Lenders look for documents such as:

  • Proof of employment and stable income (at least 2 months’)
  • Letters from credit agencies
  • Bank statements
  • Proof of Identity

You must also be a resident of India and be 25 years of age or older. If you’ve been self-employed for years and have taken loans before the age of 23, you can still go ahead and apply for a debt consolidation loan before this age limit criteria. Your lending organisation will decide which creditors you pay off after your debt consolidation loan is approved. The way this works is you pay off your highest-interest loans first and clear up the remaining ones over time.

However, some organisations may allow you to pay lower-interest loans in the beginning and later clear the higher-interest ones. This will depend on your lender whom you’re applying for a debt consolidation loan through or the lending organisation. Additionally, you will have to demonstrate your creditworthiness and show your CIBIL Score when applying for these types of loans.

How Does A Debt Consolidation Loan Affect Your CIBIL Score?

If you take a debt consolidation loan and pay off the principal portion of your loan sooner, it can attract various credit lending organisations to your profile. The sooner you clear out the existing loans, the higher your CIBIL rating will be.

Also, the period involved in making all your repayments becomes shorter since you’re clubbing different debts into a single EMI. Overall, it makes it much easier to manage your existing debt repayments. You can also get a much more reasonable interest rate when you go for debt consolidation and sometimes, you can cut that number to one-thirds depending on what your current CIBIL rating is like.

Click to comment

Leave a Reply

Banking

First Bank Partners NIBSS to Promote Digital Payment Convenience

Published

on

First Bank Sympathy Letter

By Sodeinde Temidayo David

Nigeria’s top first-generation financial institution, First Bank of Nigeria Limited, has announced its partnership with the Nigeria Inter-Bank Settlement System (NIBSS) on its recently launched Nigeria Quick Response (NQR) Payment Solution, in a bid to improve customer digital payment experience.

This was revealed by the Chief Executive Officer (CEO) of First Bank, Mr Adesola Adeduntan, who noted that the NQR is an innovative payment option implemented for all financial service providers.

“We are delighted with the adoption of the Nigeria Quick Response (NQR) payment solution, an initiative by Nigeria Interbank Settlement System plc (NIBSS) which has been instrumental to easing and promoting payment convenience with the use of mobile phones,” the CEO expressed.

As stated by Mr Adeduntan, the NQR is designed to promote quick and fast transactions by scanning the code on one’s mobile device.

He noted that the NQR is set to promote the vision of the bank, embracing technology to deliver quality and satisfactory services.

“At First Bank, we recognise the indelible role technology plays in promoting businesses across diverse frontiers and we remain committed to reinventing our technology infrastructure to meet global standards whilst being committed to staying true to our mantra in always putting You, our customers First,” he stated.

This new initiative reduces costs for merchants and banks in delivering instant value for a person to business (P2B) and person to person (P2P) transactions by simply scanning to pay.

Unlike other QR schemes, the NQR is implemented with reduced charges that are cheaper for merchants.

The initiative is accessible on the bank’s payment infrastructure as the NQR code can be used to make payments through one’s FirstMobile App and it is also available for the merchant in facilitating their business activities.

The touchpoint and use cases of the NQR payment solution include convenience stores, supermarkets, shopping malls, pharmacies, ride-hailing or taxi payments, bus fares, tolling booths payments, vending machines, e-commerce sites, online businesses amongst many others.

To access the service, customers are expected to launch the FirstMobile App and select QR payment. Afterwards, NIBSS can be chosen as a payment provider, then the seller’s NQR barcode can be scanned.

The amount is inputted for the transaction would be followed by a request for personal identification number (PIN) validation to generate an instant confirmation of the transaction successfully.

On the other hand, merchants are to visit any First Bank branch closest to them for service enrollment.

Continue Reading

Banking

Appzone Relaunches BankOne

Published

on

Appzone

By Modupe Gbadeyanka

The digital core banking solution for Africa’s fintechs and Neobanks, BankOne, has been relaunched by Appzone and re-engineered with the functionality expected to drive the exponential growth of fully digital offerings.

This follows Appzone’s Series A raise in April 2021, the largest locally-led raise in Nigeria which repositioned the organization to roll out new innovative offerings that help financial institutions function in a fully digital and automated way.

Having previously built out functionality to automate and run traditional Banking operations, Appzone is now deploying BankOne as a platform for technology-driven financial institutions intending to adopt a 360-degree digital approach that does not involve physical branches or human interaction.

With operations in Nigeria, Ghana, Gambia, and Kenya, BankOne currently hosts over 10 million customer accounts with balances totalling $105 million while managing over $650 Million in annual loan disbursements, and $2.9 billion in total transaction value.

Asides from managing customer records, loans, deposits, and accounting, BankOne provides an omnichannel self-service platform, USSD interfaces, Payment ecosystem integration, agent banking capabilities, and card management services.

These functionalities are available to Fintechs like digital lenders and neobanks, as well as traditional banks like MFIs, mortgage banks, consumer lenders and commercial banks.

Currently, challenger and traditional banks in Africa are limited to using foreign technology solutions tailored for Western markets, and many of these solutions are hindered by prohibitive pricing, poor market fit and a lack of local tech support.

BankOne’s major differentiation lies in its fit-for-purpose functionality and integrations with the local ecosystem of third-party services. These characteristics in addition to ease of customization and availability of local support ensure that the platform seamlessly plugs into the needs of African Banks and Fintechs.

Speaking on the relaunch, the CEO of Appzone Core, Mr Mudiaga Umukoro, said: “For over a decade, BankOne has played an active role in driving the digitization of Nigeria’s financial services industry.

“The platform has now been repositioned to serve the continent’s growing number of Fintechs and neobanks.

“BankOne’s major advantages are market fit and affordability which allow financial institutions deliver highly relevant products at a fraction of cost while leveraging our numerous integrations with mainstream payment systems to achieve instant interoperability with other industry players at no extra cost.”

Originally launched in 2011, BankOne is delivered and run by Appzone Core, a subsidiary of the Appzone Group.

The platform played a significant role in the first digitization phase of Nigeria’s financial sector and came to further prominence and adoption as digital challengers and neo-banks began to emerge.

As Africa rapidly accelerates towards a fully digital banking future, BankOne is being positioned to provide affordable and purpose-built digital infrastructure to enable this transition.

Continue Reading

Banking

Wigwe, Emefiele Get Juris Law Award

Published

on

Wigwe Emefiele Juris Law Award

By Modupe Gbadeyanka

For their outstanding contributions to corporate governance and rule of law in Nigeria’s banking industry, Juris Law has honoured the duo of Mr Herbert Wigwe and Mr Godwin Emefiele.

Mr Wigwe is the Chairman of Body of Bank CEOs and Group Managing Director of Access Bank Plc, while Mr Emefiele is the Governor of the Central Bank of Nigeria (CBN).

They got the award at the 2021 Judges Workshop on Banks and Other Financial Institutions Act (BOFIA) 2020 held on Tuesday, October 12 in Abuja.

Mr Wigwe and Mr Emefiele have partnered in the creation of several positive socio-economic initiatives such as the Creative Industries and Financing Initiative; a loan scheme developed to provide access to long-term and low-interest financing for entrepreneurs in Nigeria.

In addition, they were key parties in the formation of the Coalition Against COVID-19 (CACOVID) – a vehicle created to spearhead corporate Nigeria’s support for the federal government’s fight against the deadly virus.

The successful coalition funded the establishment of response centres, acquisition of medical equipment, supplies and food palliatives for vulnerable Nigerians.

Speaking on the recognition, the Access Bank chief stated that he was honoured to receive the Juris Law award, adding that “through innovative banking initiatives and our underlying sustainability drive, Access Bank will continue to create shared value for all our stakeholders, striking a balance between competitive advantage and corporate social responsibility.”

The 2021 Judges Workshop on Banks and Other Financial Institutions Act (BOFIA) 2020 focused on reforms and the statutory requirements imposed by CBN on all banks and other financial institutions in Nigeria to adopt policies on anti-money laundering and combating the financing of terrorism and cyber security in Nigeria.

Present at the occasion were the Attorney General of the Federation (AGF) and Minister of Justice (AGF), Mr Abubakar Malami (SAN); the Appeal Court President, Justice Monica Dongban-Mensen; the Chief Judge of the Federal High Court, Justice John Tsoho; the former Chief Justice of Nigeria and former Chairman, Board of Governors, National Judicial Institute, Justice Mahmud Mohammed and other high ranking judicial officers and the legal community.

Continue Reading

Like Our Facebook Page

Latest News on Business Post

Trending

%d bloggers like this: