Debt Consolidation Secrets Banks Won’t Reveal in 2025

Anjali, a young professional from Kerala, has multiple loans—credit cards, a car loan, and a personal loan for her sister's wedding. She struggles to keep up with the different due dates and interest rates each month, feeling overwhelmed by the mounting debt. 

Anjali's situation is not unique. In recent years, household debt in India has risen, reaching 42.9% of the GDP as of June 2024. This increasing debt burden has led many to seek solutions like debt consolidation. 

However, banks often prefer customers to manage multiple loans, as it can lead to higher interest payments over time. Understanding debt consolidation helps individuals manage their finances better and lower their debt. 

1. The Hidden Fees in Bank-Offered Debt Consolidation Plans

Rahul thought he had found the perfect solution when his bank offered him a debt consolidation loan. Instead of paying off multiple loans, he could merge them into one, and the bank even promised him a lower interest rate. 

But after a few months, Rahul realised he was paying much more than he had expected. Banks often add hidden fees to their debt consolidation plans, making them costlier in the long run.

Processing fees, prepayment charges, and insurance costs can add thousands of rupees to the loan. For example, a ₹5,00,000 consolidation loan with a 2% processing fee means an extra ₹10,000 upfront.

Prepayment penalties can be 3-5% of the remaining balance. Many borrowers don’t realise these fees exist until they are locked into the loan. Banks don’t openly discuss these costs, making it essential for borrowers to read the fine print before signing any agreement.

2. Why Banks Push Personal Loans Over Balance Transfers?

When customers struggle with debt, banks often suggest personal loans instead of balance transfers. 

A balance transfer allows borrowers to shift their high-interest credit card debt to a lower-interest option, reducing the overall repayment cost. However, banks make more money from personal loans and aggressively market them.

1. Higher Interest Rates Mean More Profits

Personal loans in India usually have interest rates between 10% and 24%, while balance transfer rates start as low as 0% for an initial period. 

If a borrower has ₹3,00,000 in credit card debt and chooses a balance transfer at 0% interest for 12 months, they could save up to ₹36,000 in interest. Banks lose this profit, so they discourage balance transfers.

Read More - Debt Consolidation Hacks in 2025

2. Longer Loan Tenures Benefit Banks

Personal loans usually have tenures of 3-5 years. A ₹5,00,000 loan with a 5-year term at 12% interest results in an EMI of around ₹11,122. 

Over the loan period, the borrower pays ₹1,67,320 in interest. A balance transfer, on the other hand, encourages faster repayment, reducing the bank’s earnings.

3. Additional Loan Fees

Personal loans come with processing fees (usually 1-3%), insurance fees, and even late payment penalties. If someone takes a ₹2,00,000 personal loan with a 2% processing fee, they immediately lose ₹4,000 in extra costs. 

Balance transfers often have fewer fees, making them a better choice for many borrowers.

4. Easier Loan Approvals Lead to More Borrowers

Banks make personal loans seem easy by offering quick approvals, sometimes within 24 hours. 

While this sounds great, it encourages impulsive borrowing. Balance transfers require more substantial credit scores and approval checks, so banks cannot issue them as freely.

5. Banks Sell More Insurance with Personal Loans

Many banks insist borrowers take insurance along with a personal loan, increasing the overall cost. For a ₹10,00,000 loan, insurance can cost around ₹20,000-₹30,000. With a balance transfer, insurance is rarely needed.

Comparison of Personal Loans vs. Balance Transfers

Banks push personal loans over balance transfers to make more money from long-term interest, hidden fees, and additional products like insurance. Borrowers should always compare both options before making a decision.

3. Using Home Equity Without Falling into a Trap

Ravi and his wife owned a house in Mumbai worth ₹1,00,00,000. Struggling with high-interest credit card debt of ₹10,00,000, they decided to use their home equity for debt consolidation. 

The bank offered them a ₹10,00,000 home equity loan at 9% interest—far lower than their 30% credit card interest. It seemed like the perfect solution. But they didn’t realise that they could lose their home if they missed payments.

Home equity loans allow homeowners to borrow against their property’s value, usually at lower interest rates. However, these loans come with risks. 

If the borrower fails to repay, the bank can take their house. Some banks also add hidden fees and prepayment penalties, making repayment more expensive.

Pros and Cons of Using Home Equity for Debt Consolidation

Before taking a home equity loan, borrowers must ensure they have a stable income and emergency savings to avoid foreclosure.

4. The Best Debt Consolidation Loans Aren’t Always from Banks

Most people think banks are the best place to get a debt consolidation loan. However, banks often charge higher interest rates and add hidden fees. Many non-banking financial companies (NBFCs), credit unions, and peer-to-peer (P2P) lending platforms offer better deals.

1. NBFCs Provide More Flexible Loan Terms

Unlike banks, NBFCs have more relaxed eligibility criteria. A salaried person earning ₹25,000 per month may get a loan of ₹5,00,000 from an NBFC even with a moderate credit score, whereas banks might reject the same application.

2. P2P Lending Offers Lower Interest Rates

Peer-to-peer lending platforms connect borrowers with investors, cutting out banks as middlemen. This allows borrowers to get lower interest rates. For example, a borrower with a 750+ credit score might get a 10% loan from a P2P platform, while banks charge 12-15%.

3. Credit Unions Charge Fewer Fees

Credit unions often have fewer hidden charges than banks. They offer debt consolidation loans with no prepayment penalties, helping borrowers save money.

4. Government Schemes for Debt Relief

Some government-backed loan schemes provide lower interest rates. For example, the Pradhan Mantri Mudra Yojana offers business loans up to ₹10,00,000 with lower interest, which can help self-employed individuals consolidate debt.

Comparison of Debt Consolidation Loan Providers

Exploring multiple lenders beyond banks can help borrowers find the best deals with lower costs.

5. The 0% Balance Transfer Secret Banks Hope You Ignore

Many banks offer 0% balance transfers for a limited time, allowing borrowers to shift their high-interest credit card debt to a new card without paying interest. 

If used correctly, this strategy can save thousands of rupees. However, banks don’t actively promote it because they profit less.

• Short-Term Advantage, Long-Term Trap: Most 0% balance transfer offers last 6-12 months. If the full amount is not repaid within this period, the interest rate jumps to 24-36%.
  
  
• Hidden Transfer Fees: Some banks charge a 2-3% transfer fee. For example, shifting ₹1,00,000 to a 0% card may cost ₹2,000-₹3,000 in expenses.
  
  
• Credit Score Impact: Opening a new card may temporarily lower a credit score due to a "hard inquiry." However, using the transfer wisely can improve credit health in the long run.
  
  
• Repayment Discipline is Key: If a borrower transfers ₹2,00,000 and repays ₹20,000 per month, they clear the balance before the 0% period ends. But if they only pay the minimum due, they could get trapped in a high-interest cycle.
  
  
• Not All Banks Offer It Freely: Some banks only allow balance transfers if the borrower has an excellent credit score. Others may reject applications based on internal policies.

A balance transfer can be a smart way to consolidate debt, but only if used wisely. Borrowers must plan repayments carefully to avoid falling into a higher interest trap later.

Also Read - Top 5 Debt Consolidation Mistakes

Debt Settlement vs. Debt Consolidation: What Banks Fear Most

Banks make money when people pay their loans regularly. But what happens when people struggle to pay? Two common ways to manage heavy debt are debt settlement and debt consolidation. 

Banks dislike either because both reduce their profits. Let’s break this down in simple terms.

What is Debt Settlement?

Debt settlement means talking to the bank or a lender to reduce the total amount you owe. Instead of paying the full ₹10,00,000 loan, for example, the bank may agree to take ₹6,00,000 in one lump sum. The bank loses ₹4,00,000, but it is better than getting nothing if you can’t pay.

Example: Ravi had a credit card debt of ₹5,00,000. He lost his job and could not pay EMIs. He negotiated with the bank and paid ₹3,50,000 to close the loan. The bank wrote off ₹1,50,000. Ravi saved money, but his credit score dropped.

What is Debt Consolidation?

Debt consolidation means combining multiple loans into one, usually at a lower interest rate. Instead of paying 3 different loans, each with a high interest rate of 18%, you take one big loan at 12% interest. This reduces the total EMI and makes it easier to pay.

Example:

Priya had:

• A personal loan of ₹2,00,000 at 18%
• A credit card loan of ₹1,50,000 at 24%
• A car loan of ₹2,50,000 at 16%

Her monthly EMIs were ₹15,000 in total. She took a new loan of ₹6,00,000 at 12% and repaid all three loans. Now, her EMI dropped to ₹12,000, saving her ₹3,000 every month.

Debt Settlement vs. Debt Consolidation: Key Differences

Why Do Banks Fear These?

• Debt Settlement: They lose money permanently. They fear more people will stop paying, hoping for a settlement.
• Debt Consolidation: They lose interest income. If borrowers pay lower interest elsewhere, the bank earns less.

Conclusion

Debt consolidation and debt settlement are two ways borrowers can manage overwhelming debt, but banks prefer customers to stay in long-term, high-interest loans. Debt settlement helps people reduce what they owe but damages their credit score. 

Debt consolidation makes payments easier but still benefits banks if hidden fees apply. Before deciding, borrowers must be cautious of extra charges, prepayment penalties, and loan terms. 

Exploring non-banking lenders, balance transfers, and government-backed loans can often lead to better financial outcomes. Read the fine print and compare multiple options before choosing a debt solution.

FAQs

1. What is the main difference between debt settlement and debt consolidation?
 Debt settlement reduces the total loan amount, while debt consolidation merges multiple loans into one with a lower interest rate.

2. Does debt consolidation improve my credit score?
 Yes, if you pay on time. However, applying for a new loan may cause a temporary dip in your credit score.

3. Why do banks prefer personal loans over balance transfers?
 Banks make more money from personal loans due to higher interest rates, longer loan tenures, and added fees like insurance.

4. Are there risks in using home equity for debt consolidation?
 Yes. If you fail to repay, the bank can take your house. Also, hidden fees and long repayment periods can increase costs.

5. What should I check before choosing a debt consolidation loan?
 Compare interest rates, processing fees, prepayment charges, and loan tenure. Also, check if non-banking lenders or balance transfers offer better deals.
 

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

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?