As of 2022, the National Credit Bureau states that approximately 40% of Indians suffer from multiple debts. If you are one of them, a debt consolidation loan might be the way to regain control. The process of paying several debts can be simplified and, in most cases, accompanied by lowering interest rates by consolidating all these debts into a single loan. Here you will explore the various types of debt consolidation loans and how they can help you, including credit consolidation.
What is Debt Consolidation?
Debt consolidation is a loan taken on to pay off other several small debts. The idea would be to club or merge all of them into one with a lower interest rate. According to the Reserve Bank of India, the average credit card interest rate is 34%, while personal loan rates are much lower at around 15-20%. By consolidating your debts, you’ll save a lot on interest payments.
Personal Loan for Debt Consolidation
A personal loan is one of the most popular ways to consolidate debt. It’s an unsecured loan, meaning you don’t need to put any security behind it. Personal loans come with fixed interest rates, so your payments are predictable.
For example, if your credit card debt is ₹200,000 and the interest rate is 30%, you are saving yourself ₹40,000 by paying off that amount as a personal loan at 15%. So you would be saving ₹3,000 on a monthly payment for three years.
Balance Transfer Credit Cards
Some credit cards offer a 0% introductory interest rate for an introductory period, often 6 to 12 months. If you can pay off the balance within this period, you will save quite a lot on interest.
For instance, shifting ₹1,00,000 of outstanding credit card debt to a card with 0% interest for 12 months will save you ₹30,000 if the original rate was 30%. But keep in mind that there could be balance transfer fees, and pay it off before the interest kicks in.
Home Equity Loan
A home equity loan allows you to borrow against the value of your home. Such loans usually have a lower rate because you use your home as collateral, but it also means it’s riskier because you might lose your house if you cannot repay the money.
For example, you are carrying ₹500,000 in debt on a credit card and have ₹1,000,000 in equity in the home. Consolidating with a home equity loan at 8% can save you ₹60,000 over five years.
Debt Management Plan (DMP)
A DMP isn’t a loan, but it helps consolidate your debts. A credit counselling agency works with your creditors to lower your interest rates and set up an affordable payment plan. You’ll make a single payment to the agency, and they’ll distribute it to your creditors.
On average, individuals enrolling in a DMP can reduce their debt by 20-50%. The interest rates are often reduced from 20% to 8%, and you may be able to avoid bankruptcy.
Choosing the Right Option for You
| Loan Type | Interest Rate | Collateral Required | Pros | Cons |
| Personal Loan | 15-20% | None | Fixed payments, no collateral needed | May have higher rates with low credit scores |
| Balance Transfer Card | 0-30% (intro 0%) | None | 0% interest for up to 12 months | Must pay off before interest applies |
| Home Equity Loan | 8-10% | House or property | Low-interest rates | Risk of losing home if unable to repay |
| Debt Management Plan | 8-12% | None | Can reduce total debt by 20-50% | Requires commitment, monthly fees |
Conclusion
Consolidating debts into one loan can simplify finance and save on interest payments. The three options available include a personal loan, a balance transfer card, or perhaps even a home equity loan, which may require a clearer comprehension of the pros and cons of each option.
In this case, you may want to seek a meeting with a financial advisor before finalising a loan. You may use the right plan and reclaim control of your debt, helping you move towards having an easy future without stress.
