Priya, a 32-year-old working professional, had 5 different credit cards with a total debt of ₹3 lakhs. Each month, she had to pay at least ₹10,000 across all cards. The interest rates were as high as 36%. She struggled to pay on time, often worrying about missing her payments.
But she found a solution—a debt consolidation loan. With one loan, Priya combined all her credit card debts into one manageable payment, giving her the space to breathe and the chance to get out of debt.
This story is common.
Many people in India feel trapped in their credit card debt. In fact, in the first half of 2024, credit card defaults in India increased to 1.8%, compared to 1.7% at the end of 2023.
More and more people are struggling to manage their rising credit card balances. The question is, what can a debt consolidation loan do to help in such situations?
Let’s find out.
What is a Debt Consolidation Loan?
A debt consolidation loan allows you to combine all your credit card debts into one. Instead of managing multiple payments every month, you only need to pay one loan. It simplifies your finances and can even reduce your interest rates, making it easier to pay off your debt faster.
How Does Debt Consolidation Help?
A debt consolidation loan does more than just combine your payments. It gives you control over your finances. Here’s how it helps:
- Lower Interest Rates: Credit cards often have high interest rates, ranging from 18% to 24%. A consolidation loan might lower this to 10-15%, which means less money goes to interest and more goes to paying off the actual debt.
- Simplified Payments: You no longer have to worry about juggling multiple payments and due dates. It’s just one monthly payment.
- Less Stress: With only one payment, it’s easier to keep track, and you’re less likely to miss a due date.
- Faster Debt Payoff: Because you’re paying less interest, you can pay off your debt faster.
An Example to Think About
Let’s take the example of Rohit, who had three credit cards.
He had a total outstanding amount of ₹3,50,000. Each card had a high interest rate of 36%, and it became hard for him to pay all of them on time.
Without Debt Consolidation
| Sr. No. | Credit Card Outstanding | Existing ROI (Rate of Interest) | Existing EMI | Outstanding Amount to Repay |
| Credit Card 1 | ₹50,000 | 36% | – | ₹50,000 |
| Credit Card 2 | ₹1,00,000 | 36% | – | ₹1,00,000 |
| Credit Card 3 | ₹2,00,000 | 36% | – | ₹2,00,000 |
| Total Amount | ₹3,50,000 | – | – | ₹3,50,000 |
With Debt Consolidation
| Outstanding Credit Card Amount | New ROI | New Tenure | New EMI |
| ₹3,50,000 | 11.50% | 6 years | ₹6,752 |
With debt consolidation, Rohit’s interest rate dropped to 11.50%, and now he only pays ₹6,752 per month for 6 years. This made managing his finances much simpler.
Risks to Avoid with Debt Consolidation
A debt consolidation loan can be a great tool, but it’s important to understand the risks and pitfalls that come with it. Here’s what you need to watch out for:
- Using Credit Cards Again: Some people get a consolidation loan and feel like they’re out of debt.
Then, they start using their credit cards again. This can put you right back in trouble. Avoid using credit cards unless absolutely necessary.
- Ignoring the Loan Terms: Be sure to read and understand the terms of your consolidation loan.
Some loans have penalties for late payments or hidden fees. Always be clear about what you’re signing up for.
- Not Planning a Budget: Getting a loan isn’t enough. You need to plan how to manage your money going forward. A budget helps you avoid falling back into debt.
How Debt Consolidation Works vs Credit Cards
| Aspect | Credit Card Debt | Debt Consolidation Loan |
| Interest Rates | High (18-24%) | Lower (10-15%) |
| Payments | Multiple, often stressful | One simple payment |
| Debt Growth | Increases with time | Reduced over time |
| Financial Stress | High | Lower |
| Time to Pay Off Debt | Longer | Shorter |
Things to Consider Before Getting a Debt Consolidation Loan
Before jumping into a debt consolidation loan, it’s important to assess if it’s the right option for you. Ask yourself these questions:
- Can I commit to a monthly repayment plan?
- Am I ready to stop using my credit cards?
- Do I understand the terms of the loan completely?
Debt consolidation works best when you’re disciplined and focused on getting out of debt. For people who want to manage their finances better and get rid of the hassle of multiple payments, it’s a great choice.
Conclusion
If you find yourself trapped in credit card debt, a debt consolidation loan can be a smart solution. However, it’s not a free pass to go back to bad spending habits. You need to be disciplined and plan your finances well.
Debt consolidation helps people like Priya and Rohit break free from the debt cycle. But remember, the answer to staying out of debt is changing your habits.
Keep a budget, avoid unnecessary spending, and stick to your payment plan. With the right approach, you can take control of your finances and stay debt-free for good.
FAQs
- Will my credit score improve after using a debt consolidation loan?
If you make regular payments on time, your credit score can improve over time.
- What happens if I miss a payment on my debt consolidation loan?
Missing payments can result in extra fees or higher interest, so it’s important to pay on time.
- Is it safe to get a debt consolidation loan online?
Yes, but only use trusted lenders. Always check their reviews and read the terms carefully before signing.
- How fast can I pay off my debts with a consolidation loan?
With lower interest rates, you can usually pay off your debts faster, sometimes within 5-7 years depending on the loan terms.
