Debt Consolidation Myths – Don’t Risk Your Financial Future

We were at the school reunion, and you won’t believe who I ran into: Arnav, my best friend from 4th grade! It had been 15 years since we last met. Time does fly without any notice, doesn’t it? 

Our biggest concerns back then were 10-mark homework assignments, fighting over stationery items, and laughing at everything. Now? We’re talking about investments, debating about his questionable financial decisions, and the debt consolidation myths he has in his mind. ‘Ab Ise Kaise Samjhau?’

I tried telling him that moving all his credit card debt (₹2,00,000) onto one low-interest loan would not fix his finances. But, of course, ‘Meri Kon Sunta Hai?’ Fast forward 6 months, and—surprise, surprise—he’s somehow ₹50,000 deeper in debt. 

Debt consolidation can work only if you avoid the myths that turn it into a financial trap. If you think consolidating debt automatically saves money, think again.

In 2025, 67% of borrowers admitted they fell for at least one debt consolidation myth. Let’s bust 5 lies that might be draining your wallet faster than a ₹999 Netflix subscription.

Myth 1: Debt Consolidation Instantly Fixes Your Credit Score

Many people think that debt consolidation instantly boosts credit scores. ‘Galat Soch!’ However, it often causes a temporary dip due to a hard inquiry. 

A hard inquiry occurs when lenders check your credit report for credit eligibility. This leads to a temporarily lowered score due to increased risk perception and the impact of credit age.

According to a 2025 Credit Health Report, 42% of borrowers saw a 20-point drop initially. However, those who paid EMIs on time gained 50–80 points within a year. This proved that responsible repayment leads to long-term credit improvement.

For example, Aarav is a 32-year-old IT professional. He had ₹6,00,000 in outstanding loans, split between credit cards and 

personal loans. Managing multiple EMIs was stressful, so he consolidated his debt with a ₹6,00,000 loan at a lower interest rate.

However, he was shocked when his credit score dropped by 20 points within the first three months. This was due to the lender’s hard inquiry and the impact of the new loan.

Read More – Why Debt Consolidation Works for Some People (and Fails for Others) – Key Insights
 

Instead of panicking, Aarav stayed disciplined, making his ₹18,000 EMI payments on time. Within a year, his credit score improved by 75 points. You see how responsible repayment builds strong credit health.

Myth 2: All Consolidation Loans Have Lower Interest Rates

Freedom of expression doesn’t mean you can say just anything, right? Debt Consolidation loans often work as a financial lifesaver, but it does not mean that every consolidation loan is automatically cheaper. That’s a myth! 

Before offering a loan, lenders evaluate your credit history, income stability, and repayment ability. You may qualify for lower interest rates if you have an excellent credit score. But you may get higher rates with poor credit than your current debt. Here’s the comparison table for different loan types:

For example, Rajnath had ₹4,00,000 in credit card debt at 18% interest and thought a personal loan would help him save money. So, he applied for it, only to be offered 19% interest—even higher than before!

Had he read our blog, he would know that not all consolidation loans come with lower rates. After much research, he opted for a loan against property at 10%. Let’s see his financial journey with the help of this table: 

Myth 3: Only Perfect Credit Scores Qualify

Having a credit score of 750+ is excellent. Finally, your financial discipline will benefit you when applying for a loan. It is like getting front-row seats at a theatre, a premium experience at a better price!

But having a low score, like 600, doesn’t mean you would not get entry. That is a myth! NBFCs and fintech lenders do offer loans to those with lower scores. But the interest rate range is 18-24%, which is higher than you thought, right? It’s like buying overpriced popcorn at the movies; you’ll get what you need but at a much higher cost!

But, just because you can get a loan with a low credit score doesn’t mean it’s the best financial decision. You can get deals with higher EMIs, stricter terms, and increased financial stress.

For example, Amit needed a loan for his sister’s wedding, but his credit score was 720. He knew banks would reject him, so he turned to an NBFC. It approved his loan at 22% interest. 

The wedding was good. Hope we can say the same for his finances. 

With high EMIs, his struggle to pay off the debt was real. Had he boosted his score earlier, he could have secured a 10% bank loan, saving ₹5,000 per month.

Myth 4: Debt Consolidation = Debt Settlement

Financial terms can be confusing; we get it. Not everyone can be Warren Buffett, but that doesn’t mean you should make decisions based on what you assume. One common misconception is that debt consolidation is the same as debt settlement. Big mistake! Consolidating multiple loans into one doesn’t mean you pay less than what you originally borrowed. ‘Galatfehmi hai!’

Also Read - The Real Cost of Debt Consolidation: Is It Worth It?
 

Here’s the key difference: consolidation combines debts into one for more manageable repayment, while settlement negotiates to reduce the amount owed. They serve entirely different purposes. To clear up any confusion, take a look at the table given below:

For Example, Neha and Riya both had ₹7,50,000 in debt, but they took different approaches to dealing with it.

Neha had five different loans with varying interest rates and EMI dates. To simplify things, she opted for debt consolidation. She took a single loan at 12% interest to pay off all her previous debts. Now, she has just one EMI of ₹18,500 per month. While sharing her story with us, she said that she will be debt-free within 5 years.

Riya, however, was struggling to make payments. She chose debt settlement. A company negotiated with her lenders to reduce her debt to ₹5,00,000. Sounds great, right? Not really. Her credit score dropped by 120 points, making future loans much harder. Plus, she had to pay ₹75,000 in settlement fees.

Myth 5: Consolidation Works for All Debt Types

Tisha, my tuition teacher, assumes that debt consolidation applies to all types of debt.  Student loans, medical bills, tax liens,  just throw ’em all in! ‘Khichdi Hai Ya Debt Consolidation Loan?’

This misconception can lead people like Tisha to waste time applying for consolidation loans that don’t cover certain types of debt. In the worst-case scenario, they can face legal consequences for trying to include debts that aren’t allowed.

Debt consolidation works only for specific types of debt. However, certain debts cannot be consolidated, especially those tied to government obligations or secured loans. With the table below, you can get a brief overview of different debts and their eligibility to get consolidated:

Conclusion

Debt consolidation can be a powerful tool, but only if done wisely. ‘Bina samjhe bas dusron ki mat suno.’ Analyze real data and save yourself from falling into a major financial trap. Treat it for what it is, a way to simplify debt repayment. It is not some ‘jugaad’ for an overnight credit score boost or magically lower payments.

One wrong move and you’ll end up with even more debt, a messed-up credit score, and unnecessary stress. Play it smart. Borrow responsibly, plan your repayments properly, and make debt consolidation work for you.
 

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?