10 April, 2025 | 16:06 IST
Managing multiple loans can be overwhelming – each with its own interest rate, due date, and repayment terms. Juggling multiple payments every month can strain your finances and make tracking them a hassle.
One way to simplify this is through debt consolidation, combining all your existing debts into a single loan. This not only streamlines your repayments but may also offer lower interest rates and reduced monthly payments.
However, is a personal loan the right way to consolidate debt? Let’s find out.
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Consolidating personal loan debts by taking a larger personal loan can be a strategic choice. Since you will have to track personal loan EMI for only one source of debt, it will simplify the management of your finances and could lead to savings over time.
For example, if the interest rate for your credit card debt stands at 37%, and you consolidate it into a personal loan with an interest rate of 16%, it can lead to significant savings.
It is important to be clear about your repayment plans. Consolidation should not be an excuse to accumulate more debt, as failing to manage repayments can worsen financial stress.
So how should you go about searching for personal loans? You can download the Moneycontrol app to get the best loan offers. You can borrow up to Rs 50 lakhs with interest rates starting at 10.5% annually. It is a hassle-free, online process, and you don’t need to provide any collateral to be eligible for the loans.
Simplified repayment plan
One of the most obvious advantages of using a personal loan to consolidate debt is that it simplifies your repayments. After consolidation, you will not need to track multiple personal loan debt repayments. Instead, you can focus on just one repayment, making it easier to track and avoid missing any payments.
Lower interest rates
If the interest rate on the loan you take is lower than the interest rate on your existing debt, then you will save on your interest payments over time. This is especially relevant if your existing debt comprises credit card debt, which usually has a much higher interest rate compared to personal loans.
You could also clear your debt over a much shorter period, thus relieving you of debt faster.
Improving credit score
Paying personal loan EMI on a consolidated debt will help to improve your credit score. If you use the loan to clear credit card debt, it lowers your credit utilisation ratio, which is a key factor in determining your credit score.
Fixed repayment schedule
Personal loans have predefined repayment schedules. Personal loan rates are usually fixed, giving you clarity on how much you need to pay monthly. It helps you better prepare your budget for the future.
Fees and additional costs
You must consider the charges you will need to pay on a personal loan before deciding to consolidate your debt. Some of the charges personal loans come with are processing charges, origination fees, and prepayment penalties. These can reduce the savings you plan to gain from debt consolidation. That’s why, you must thoroughly evaluate the full cost of availing yourself of a loan before taking a call on debt consolidation.
Risk of increasing debt
Before you consolidate your debt, you need to introspect on whether you will be able to repay the consolidated personal loan. Without responsible spending and disciplined repayment, you might end up accumulating even more debt, making your financial situation worse. Consolidation helps, but only if paired with better money management.
Impact on credit score
When you apply for a personal loan, it will lead to a hard inquiry on your credit score. This can hurt your credit score in the short term. Further, if you fail to make payments on time, then your credit score will be negatively impacted as well.
Longer Repayment Period Leading to Higher Interest Payment
While personal loans can lead to lower monthly payments, they can lead to an extended repayment period. This can lead to greater interest payments over time.
To conclude, taking a personal loan to consolidate multiple debts is an attractive proposition. But it comes with its own set of challenges. By carefully considering your options, you should decide if consolidating debt with a personal loan could help you ease your financial burden. If you are looking forward to a personal loan for debt consolidation, Moneycontrol could be a suitable platform to explore multiple digital loan offers. Moneycontrol offers access to loans up to Rs 50 lakhs from eight lenders, with the interest rates starting at 10.5% per annum.
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