Debt Consolidation: Benefits and low Interest rate debt consolidation loans

Credit Card Loan

Last Updated on 05/05/2022 by Deepak Singla

Debt can be defined as the amount of money that one party borrows from another party. It is used by large firms and individuals as a procedure of making big purchases which they couldn’t have afforded under normal situations. The most common forms of debt are home loans/mortgage, bonds, car loans, bonds, credit card debts, and so on. In this kind of arrangement, the borrowing party gets permission to borrow money under the condition that it has to repay at a later date, along with interest.

What is Debt Consolidation?

what is debt consolidation

Debt consolidation is defined as the process of taking a new loan to repay other liabilities and consumer debts.

It is used by the consumers to repay a small debt in one go by taking one single big loan.

Debt Consolidation is especially beneficial when you have high-interest rates debts. By doing this, the consumers not only save on interest but also the finance cost of the small loan owed by them.

How debt consolidation works

Debt consolidation is the procedure of using different types of financing to repay other debts and liabilities. It opens a single line of credit that provides enough funds to pay off the existing debts, and then you can make monthly payments towards that new line of credit.  Debt consolidation loans have lower interest rates and are perfect for anyone who wants to get rid of the financial burden of carrying multiple debts. It also comes with a longer repayment term that enables the borrower to pay off the debt without putting much strain on his/her finances. Financial institutions like banks, credit unions, or credit card companies offer these kinds of loans to eligible applicants. Furthermore, both public and private financial companies also provide debt consolidation loans to consolidate existing debts. However, keep in mind that debt consolidation loans do not eliminate the original debt. They only transfer the consumer’s loans to a different lender or type of loan.

Debt Consolidation Loan

debt consolidation loan

A debt consolidation loan can be taken to repay many high-interest debts with one new low-interest loan. It is a strategy of simplifying finances for those consumers who are dealing with several unsecured debts like credit cards, medical bills, or personal loans. Consumers wind up their unsecured debts into one single bill and use the consolidation loan to repay the total amount owed. Several financial institutions offer debt consolidation loans to borrowers who have trouble managing the number or size of their outstanding debts.

Features of Debt Consolidation Loans in India

  • Longer repayment tenure
  • Low-interest rate of debt consolidation loans and hence lower premiums
  • Available within a deferred payment period
  • Reduced payment over the entire lifetime
  • Increased disposable income

Benefits of Debt Consolidation Loans

Major benefits of debt consolidation loans are listed below:

benefits of debt consolidation

  1. With debt consolidations, it is easier to manage the payment deadlines since it combines all your debts into one lump sum payment and you only have to worry about one regular payment.
  2. A debt consolidation loan focuses on one interest rate which is lower since it is a big amount.
  3. It relieves you from stress and provides peace of mind as you can save yourself from the pressure of having multiple payments and interest rates
  4. Regular payments help you to maintain a good credit score.
  5. You can offer collateral if you can manage regular payments. In this case, a debt consolidation loan is advantageous since we just have to offer the one asset up as collateral.

Documents required to get debt consolidation loans in India

  • Valid identity proof such as Aadhaar card/Voter ID/PAN card/driving license, etc.
  • Address proof like Aadhaar, Passport, post-paid phone bills, electricity bills, etc. to prove your residency
  • Copies of salary slip and bank account statements for the last three to six months to evaluate your income, obligations, and repayment capacity.
  • Copy of your employee ID card or other proof of employment

Example of Debt Consolidation

Loan Details Credit Cards (3) Consolidation Loan
Interest % 28% 12%
Payments $750 $750
Term 28 months 23 months
Bills Paid Per Month 3 1
Principal $15,000 ($5,000 * 3) $15,000
Interest $5,441.73($1,813.91*3) $1,820.22($606.74*3)
Total $20,441.73 $16,820.22

Say you have three credit cards that charge a 28% annual percentage rate (APR). Your cards are maxed out at $5,000 each and you’re spending $250 a month on each card’s minimum payment. If you were to pay off each credit card separately, you would spend $750 each month for 28 months and you would end up paying a total of around $5,441.73 in interest.

However, if you transfer the balances of those three cards into one consolidated loan at a more reasonable 12% interest rate and you continue to repay the loan with the same $750 a month, you’ll pay roughly one-third of the interest—$1,820.22—and you can retire your loan five months earlier. This amounts to a total savings of $7,371.51—$3,750 for payments and $3,621.51 in interest.

Types of debt consolidation

Debt consolidation loans can be divided into two types- secured and unsecured loans.

  1. A secured debt consolidation loan is backed by collateral like home, property, or car.

2. An unsecured loan is backed by the borrower’s promise to repay, and are difficult to obtain.

Listed below are several ways by which you can clump your debts together by consolidating them into a single payment.

  • Home Equity Loans: This is a kind of loan that is taken out using the equity in your home as collateral. Using a home equity loan for debt consolidation is one of the best ways for eliminating credit card debt. Although the interest rates of home equity loans are lower than other types of loans, one of its demerits is that your home will be on the line for your credit card and other accumulated debt. Owing to this reason, if you fail to make the required payments, you face foreclosure on your home.
  • Credit Card Balance Transfers: With the help of a credit card balance transfer, you can transfer the balances due on several credit cards onto just one card, and repay them with no interest for an introductory period ranging from 6-24 months. If you want to use a credit card balance transfer for consolidating your debt, then you should have a credit card that has a sufficient credit limit to hold all your credit card debt.
  • Personal Loans: A personal loan is a form of an unsecured loan that comes with an interest rate based on credit score. It can be used for debt consolidation purposes if you can borrow a loan that is big enough to cover all your balances. Your credit score will decide whether you are getting a personal loan or not. Once your personal loan is approved, you can use it to consolidate your debts. However, do not take a high-interest rate personal loan as it might not let you save money in the long-run.
  • Loan from Family or Friends: Getting a loan from family or friends is one of the best options since the terms and interest rates of such loans are flexible. The advantage of getting a debt consolidation loan from a family member or friend is that they are not competing with any other lender and so they can set the interest rate however low they desire. The tenure of the loan can be shortened or extended whenever required. The loan agreement should spell out the agreement in basic terms and must be written down in case things get complicated.

How do I consolidate student loans?

Student loan consolidation can be divided into 2 types- federal student loan consolidation and private student loan consolidation.

federal student loans vs private student loans

  • Federal student loan consolidation integrates several federal loans into a single federal loan through the Department of Education. Although federal consolidation will not lower your interest rate, it may lower your payments by extending them.
  • Private student loan consolidation, which is also referred to as student loan refinancing means replacing various Education loans (private, federal, or a mixture of two) with a single, new private loan. If you qualify for student loan refinancing, you can save money by getting a lower interest rate.

Should I consolidate my debt?

should you consolidate debt

Debt consolidation might not be the best option for you if you have a lot of debts that you can’t repay even with reduced payments. When you are taking a debt consolidation loan, it means that now you will have only one company to repay each month. However, if you are making large payments to that company each month and over a long period, it will result in you paying more than the term of the loan. You are required to check whether you are eligible for the loan that is affordable to you. Look at your income and expenses to see how much money you have and accordingly decide if you can comfortably afford the repayments.

When is debt consolidation a good idea?

You can consider the idea of debt consolidation if:

  • Your total debt (excluding mortgage) does not exceed 40% of your overall income
  • Your credit score is good and you can qualify for a 0% credit card or a low-interest debt consolidation loan
  • You have a plan to keep yourself out of debt to avoid running up further debt
  • Your cash flow constantly cover payments toward your debt

Is it possible to get a debt consolidation loans with Bad credit?

If your credit score is low that is if you have a track record of missed payments or past insolvencies such as an individual voluntary arrangement (IVA) or bankruptcy, you will be offered debt consolidation loans that have higher interest rates. Consolidation loans with higher interest rates might not be the best solution for you.

Debt Consolidation without debt consolidation loans

Besides opting for debt consolidation loans, you can also choose other ways of settling your outstanding debts effectively. Of the most effective ways is to opt for debt management plans that are provided by debt management or consolidation agencies. In case of debt management plans, you don’t need to opt for loans as these agencies work along with credit card providers and other financial institutions that reduce the interest rates for the debtor. A decrease in interest rate reduces the financial burden of the borrower and makes it easier for the debtor to pay the debt.

The alternative of debt consolidation

  • Debt management plan: A debt management plan can be defined as a contract between you and your creditors to repay all your debts. You can sort out a plan with your creditors through a licensed debt management firm for a fee. After sorting out the plan, you don’t have to worry about anything as the firm will negotiate with the creditors on your behalf. You might also get benefits like lower interest rates, reduced penalties, and so on in exchange for a stable repayment plan. The duration of this plan is 3 to 5 years. During this period, you have to make a single payment to the firm every month, and the debt management firm will distribute the payments to your creditors.
  • Credit Counseling Organizations: Credit counseling organizations have trained and certified counselors who can guide you in fields like consumer credit, debt management, budgeting, and money management. The counselors will discuss your financial conditions with you and will help you to develop a foolproof plan so that you can solve your money problems.
  • Debt settlement: Debt settlement plan is an option for those people who have a poor credit score since it can save your money as well as can help you to reduce your debt quickly. This plan involves a series of negotiations between you and your creditors in which you seek to reach a contract that enables you to settle your debt for less than what you currently owe. In the beginning, your creditor might not be happy with this plan, but later they might agree to settle with you so that they can make more money.
  • Bankruptcy: You can file for bankruptcy if you are certain that the above options cannot help you to get you out of debt. There are 2 types of bankruptcy- chapter 7/liquidation bankruptcy and chapter 13/reorganization bankruptcy. Chapter 7 allows the bankruptcy trustee to sell your assets so that it can cover as much debt as possible. Such assets include your house, car, furniture, and so on. If you are not eligible for chapter 7, you have to file for chapter 13. With chapter 13, you can prepare a 3 to 5 years repayment plan which will partially cover your debts. However, the court should agree that the repayment plan is adequate to eliminate the debt.

Difference between debt consolidation and debt settlement

Debt Consolidation is the process of taking a single new loan to repay old loans. It reduces your finance cost since you have to make fewer payments every month.

However, a debt settlement plan involves a series of negotiations between you and your creditors in which you seek to reach a contract that enables you to settle your debt for less than what you currently owe. Debt settlement is risky since you are refusing to pay the required amount to your creditor. This not only ruins your credit score but also opens you to being sued for payments, and there is no guarantee that your creditor will agree to your negotiations.


  • You should choose a debt consolidation plan when:

a) You want a loan with a low-interest rate that saves your money an enables you to repay your debt sooner

b) To reduce the number of payments you are juggling with at present

c) The debt you are trying to pay off is of a manageable amount

  • Choose a debt settlement plan when you have an account that is already delinquent and you think that the creditor will accept a partial payment.

Debt to Equity Ratio

Debt to Equity Ratio is a type of leverage ratio that is usually known as gearing or risk ratio. A leverage ratio can be defined as a financial ratio that indicates the total amount of debt incurred by a firm against several other accounts within their income statement or balance sheet. Leverage ratios offer a thorough insight into the financing structure of a firm which in turn enables the users and investors to comprehend how the major operations of the firm are being financed in real-time. There are different types of leverage ratios, some of them are listed below:

  • Debt to Asset Ratio
  • Debt to Equity Ratio
  • Debt to Capital Ratio
  • Debt to EBIDTA Ratio, and so on

Debt to Equity Ratio Formula

The debt to equity ratio can be represented mathematically as the total debt or total equity that calculates the weightage of the total debt or monetary liabilities against the total equity of the shareholder.

Debt/Equity Ratio Formula: Total Debt (Long Term + Short Term)/Total Shareholder’s Equity

Usually, a high debt to equity ratio indicates that a company can skillfully manage its debt through an effective flow of capital along with utilizing the leverage to improve the equity returns.

Debt Collection

The procedure of collecting debts by the financial institutions is known as debt collection. Ideally, one who takes the debt (the debtor) is supposed to pay off the debt within the given timeframe along with the applicable interest rate over the principal amount. When the debtor is unable to pay off the /debt, then the financial institution (the creditor) can take legal action against the debtor.

Debt Collector

The financial institutions take the help of debt collection agencies to collect their debt from the borrowers. The original creditor from whom you have taken the debt will ultimately transfer your case to the debt collection agency if you have missed many repayments without giving any formal information to the creditor. Debt collection agencies make use of several ways to collect unpaid debts from borrowers. In the beginning, they will start calling on your personal contact number or your employer’s number frequently followed by sending legal notices to your place of residence and work. They might also show up at the home or office of the debtors for collecting the debt. Once the debt collector realizes that you are ignoring their phone calls and legal notices, they will send a validation deadline. The validation deadline is sent in order to gather proof that you owe an unpaid debt to a financial institution.

Your credit score will be badly affected if your original creditor transfers your case to a debt collection agency. This in turn will decrease your chances of getting credit cards or loans when you apply for them in the future.


Debt consolidation is not the best solution for debt issues. It does not answer your excessive spending habits that have created the debt at the beginning. Also, it is not the solution if you are overwhelmed by debt and you have no hope of repaying it with reduced payments.


Q: What type of debt can I consolidate?

A: You can consolidate credit cards, high-interest loans, medical bills, etc. Apart from this, multiple student loans can also be consolidated by refinancing federal and private student loans into one single loan.

Q: What is the minimum loan amount I can consolidate with a private consolidation student loan?

A: The minimum loan amount you can consolidate with a private consolidation student loan is $5,000.

Q: Do consolidation loans impact your credit score?

A: If you make your repayments each month regularly, then your credit score won’t get impacted. However, if the total cost of the new loan makes it more difficult for you to manage your repayments, and you miss any one of them, these failed payments will get recorded in your credit card history.

Q: What is an Unsecured Debt Consolidation Loan?

A: Unsecured means the loan is not linked to your house. These kinds of loans require you to secure the loan against your home. But if you fail to make payments regularly and cannot afford to repay the amount you owe, you are at risk of your house being repossessed.

Q: Is consolidating credit cards a good idea?

A: Yes, you can if you get a loan at better terms or if it can help you to make payments on time. Just make sure that you do not run out of new balances on the cards you have consolidated.

Q: What kind of interest rates will I get with a balance transfer?

A: Usually, a balance transfer offers low promotional rates. Rates can be as low as 0%, but it will depend upon the offers that are available to you.