Consolidating Your Debt ? Here’s What Financial Advisors Recommend

In recent years, many Indian households have handled multiple loans—credit cards, personal loans, and more. For instance, consider Rajesh, a marketing professional from Mumbai who manages a home loan of ₹50,00,000, a car loan of ₹8,00,000, and credit card debt amounting to ₹2,00,000. 

This scenario isn't unique. According to a Reserve Bank of India report, household debt in India has risen to 42.9% of the country's GDP as of June 2024.

Many are exploring debt consolidation to simplify repayments and reduce interest burdens with escalating debt levels. But is this the right move for you in 2025? Financial advisors weigh in to guide your decision.

1. Assess Your Total Debt and Interest Rates

Before making any financial decision, first understand how much you owe. Many people think they have a rough idea, but the total amount surprises them when they calculate everything.

Take Ananya, a software engineer from Bengaluru. She had a home loan of ₹40,00,000 at 8% interest, an education loan of ₹5,00,000 at 10%, and credit card dues of ₹1,50,000 at 36%. When she finally sat down to calculate, she realised she was paying over ₹5,00,000 in interest alone yearly!

To assess your total debt:

• List all loans, their outstanding amounts, and interest rates.
• Sum up your total debt and total monthly EMI payments.
• Identify which debts have the highest interest rates (usually credit cards or personal loans).

Consolidating your debt could be smart if you pay a high-interest amount every year.

2. Compare Debt Consolidation Options

There are several ways to consolidate your loans. The best option depends on your total debt, credit score, and repayment ability.

Take the example of Rohit, a small business owner in Delhi. He had multiple loans—a business loan of ₹15,00,000 at 12% interest, a personal loan of ₹3,00,000 at 14%, and credit card dues of ₹2,00,000 at 36%. 

He was struggling to pay EMIs on different dates. After speaking to a financial advisor, he took a secured loan against his property at 9% interest and combined all his loans into one. His EMI was reduced, and he saved money on interest.

Common Debt Consolidation Options in India

Before choosing an option, compare:

• Interest rate vs. your current loan rates.
• Processing fees and prepayment charges.
• Whether the new loan tenure is too long increases overall interest.

Debt consolidation only works if the new loan has a lower interest rate or makes your EMI payments more manageable.

3. Check Your Credit Score Before Applying

Your credit score plays a huge role in getting a good loan deal. Lenders check your CIBIL score before approving your loan. A score above 750 gets you the best interest rates, while a score below 650 may lead to rejection or high interest rates.

Amit, a marketing professional from Pune, applied for a personal loan to consolidate his debts. He assumed he had a good score. 

However, when the bank checked, his CIBIL score was 620, and he was offered a loan at 18% interest, higher than his current loans. He realised late that he should have checked and improved his score before applying.

To check and improve your credit score:

• Get a free credit report from CIBIL, Experian, or Equifax.
• Pay EMIs on time—one missed payment can drop your score.
• Avoid maxing out your credit card limit.
• Don't apply for multiple loans quickly—it makes you look credit-hungry.

If your score is low, wait for a few months, clear pending dues, and improve your score before applying. A good score can save you lakhs in interest.

4. Consider Fixed vs. Variable Interest Rates

One of the most critical decisions in debt consolidation is choosing between fixed and variable interest rates. Each has its pros and cons, and the right choice depends on your financial situation and market trends.

Take Priya, a 35-year-old teacher from Chennai. She wanted to consolidate her ₹10,00,000 loan and got two offers: one with a fixed interest rate of 10% and another with a variable rate starting at 8% but changing yearly. 

She was confused—should she take the stable but slightly higher fixed rate or risk the fluctuating variable rate for possible savings?

Fixed vs. Variable Interest Rates

Which One Should You Choose?

• If you want predictable EMIs, choose fixed interest rates.
• If you believe rates will remain low or reduce, choose variable interest rates.
• If taking a variable rate, ensure you can afford an increase in EMI if rates go up.

5. Calculate the Total Repayment Cost

Many people focus only on interest rates, but the total repayment amount matters most. A lower interest rate may cost more if the loan tenure is too long.

For example, Ramesh took a ₹5,00,000 personal loan at 10% interest for 5 years. His friend Akash took the same loan for 10 years at 8% interest. Surprisingly, Akash paid more interest over time, even though his rate was lower!

Factors Affecting Total Repayment Cost

1. Interest Rate vs. Loan Tenure

A lower interest rate does not always mean a cheaper loan. The longer the tenure, the more interest you pay. For example:

• ₹5,00,000 at 10% for 5 years = ₹1,37,500 interest
• ₹5,00,000 at 8% for 10 years = ₹2,29,000 interest

2. Prepayment Charges

Some banks charge a penalty if you repay your loan early. Always check:

• Personal loans: 2-5% prepayment fee
• Home loans: No charges if on floating interest rates

3. Processing Fees & Hidden Costs

Every loan has extra costs like:

• Processing fees: ₹5,000 to ₹25,000 depending on loan type
• Legal charges: If it’s a secured loan like a home loan
• Insurance fees: Some lenders require loan protection insurance

4. EMI Affordability

Lower EMI sounds attractive, but check if you can afford higher EMIs to clear your loan faster.

• ₹5,00,000 loan at 10% for 5 years = ₹10,624 EMI
• ₹5,00,000 loan at 10% for 10 years = ₹6,607 EMI
   Smaller EMIs increase total interest paid!

5. Future Financial Plans

Before consolidating, ask yourself:

• Do you plan to take another big loan (home/car loan) soon?
• Will your income increase in the next few years?
• Are you comfortable with higher short-term EMIs to save money in the long run?

6. Look for Low or No-Fee Consolidation Plans

Debt consolidation should save you money, not add more expenses. Many banks and NBFCs charge high processing fees, prepayment penalties, and hidden costs. Before selecting a plan, compare lenders and choose one with low or no fees.

Take the case of Arjun, a graphic designer from Hyderabad. He wanted to consolidate his ₹8,00,000 loan. One bank offered 10% interest with a ₹20,000 processing fee, while another offered 11% interest with zero fees. After calculating, he realised that the second option was cheaper in the long run.

Comparison of Debt Consolidation Plans

Tips to Find Low-Fee Plans

• Compare processing fees: Some banks waive this for existing customers.
• Check prepayment rules: If you plan to close early, avoid lenders with high charges.
• Negotiate: Some fees are negotiable, especially for good credit score holders.
• Read the fine print: Watch out for hidden costs like legal charges or insurance fees.

7. Beware of Debt Consolidation Scams

Debt consolidation can help manage loans better, but scammers target people desperate to clear their debts. Many fraud companies promise low rates or quick approvals but disappear after taking fees.

Ritika, a homemaker from Pune, saw an online ad for a low-interest personal loan. The company asked for ₹5,000 processing fees upfront and claimed her loan would be approved in 24 hours. She paid but never got the loan. Later, she found out it was a scam.

Red Flags of Debt Consolidation Scams

How to Stay Safe

• Verify lender details: Check their RBI registration on the official website.
• Never pay upfront fees: Processing fees should be deducted from the loan amount, not paid separately.
• Check customer reviews: Search for complaints before trusting a lender.
• Read documents carefully: If terms seem unclear, get legal advice.

8. Keep Your Spending in Check Post-Consolidation

Consolidating debt solves past issues, but it doesn’t stop future financial mistakes. Many people continue using credit cards or take new loans after consolidation, falling back into debt.

Amit, a sales executive from Mumbai, consolidated his ₹6,00,000 credit card debt into a personal loan. His EMI became lower, but instead of saving, he started spending on his credit card again. Within a year, his debt doubled.

How to Avoid Falling Back into Debt

• Create a monthly budget – Track expenses and stick to a spending plan.
• Avoid unnecessary credit card use – If you consolidated a credit card loan, don’t accumulate new debt.
• Build an emergency fund – Save at least ₹50,000-₹1,00,000 for unexpected expenses.
• Set automatic EMI payments – This prevents missed payments and late fees.
• Increase loan repayments if possible – If you get a bonus, prepay part of your loan.
• Learn better money habits – Read financial books, take free online courses, and improve money management skills.
• Reward yourself smartly – Instead of spending more after clearing debt, focus on building savings.

Conclusion

Debt consolidation can make repayments easier and reduce interest burdens, but only if done smartly. First, calculate your total debt and interest. Then, compare options to see if consolidation helps you save money. Lastly, check your credit score before applying to get the best deals.

A good financial plan today can help you achieve debt-free living sooner. If you’re struggling with multiple loans, speak to a financial advisor to make the best choice for 2025!

FAQs

1. What is debt consolidation, and how does it work?

Debt consolidation combines multiple loans into a single loan with a lower interest rate or manageable EMI. It helps reduce the burden of handling multiple payments.

2. Does debt consolidation hurt my credit score?

No, if done correctly. Initially, your score may drop slightly due to a new loan inquiry, but over time, making timely payments can improve your credit score.

3. What are the best ways to consolidate debt in India?

Popular options include personal loans, loan against property, balance transfer on credit cards, and gold loans. The best choice depends on your loan amount and interest rate.

4. Is debt consolidation always a good idea?

Not always. It works best if the new loan has a lower interest rate and no high processing or prepayment fees. Otherwise, you may pay more in the long run.

5. How can I avoid falling into debt again after consolidation?

To stay debt-free, create a monthly budget, avoid unnecessary credit card use, save for emergencies, and automate EMI payments.

6. Is it better to pay minimum due or consolidate credit card debt?

Consolidating is far better. Paying only the minimum due mostly covers interest and barely reduces your actual balance. Consolidation clears the full amount and gives you a fixed repayment timeline.

7. Can I consolidate multiple credit cards?

Yes. You can club dues from multiple credit cards along with personal loans into one consolidation loan through LoansJagat, up to ₹50,00,000 in total.

8. What documents are needed for credit card debt consolidation?

You need your PAN, income proof, bank statements, and details of your existing loan and credit card outstanding.