Raj, a 30-year-old from Bengaluru, has three outstanding credit cards. Every month he pays interest rates as high as 30%, and he has difficulty managing the three different dates. He finally succumbed to the pressure and took out a personal loan at 12% interest to combine all his debts into one account. Now he only has to worry about paying back a single loan amount monthly and his life is less complicated with his financial obligations.

This is how a personal loan for debt consolidation can make everything simpler and cheaper. However, it isn’t a solution that works for everyone. So let’s take a closer look at it step by step and understand its gains and leaks.

What Is Debt Consolidation?

Debt consolidation simply means combining all these separate debts into one single loan. Paying creditors through use of a personal loan means repaying all existing debts and leaving with one monthly payment. 

So if you owe ₹1,00,000 on three credit cards at an average interest rate of say 25%. It would mean that converting that under a personal loan with an interest of about 11% would mean you have just saved a lot of interest over time.

Advantages of Personal Loan Debt Consolidation

Example:
Let’s say Neha had three credit card debts:

• ₹40,000 at 22% interest
• ₹30,000 at 25% interest
• ₹20,000 at 18% interest

Her monthly payments became unmanageable. By taking out a personal loan of ₹90,000 at 12% interest, she was able to save more than ₹5,000 on interest payments every year and pay off her debts sooner.

Risks of Debt Consolidation

While the benefits are clear, there are also risks of personal loan debt consolidation:

1. Credit Score Impact: Applying for a personal loan requires a hard inquiry, which might temporarily reduce your credit score.
2. Fees and Costs: Some loans come with processing fees (e.g., 2%-3%), which can add to your costs.
3. Not a Long-Term Fix: If overspending caused your debt, consolidation won’t solve the root problem.
4. Risk of Higher Rates: Borrowers with low credit scores may not qualify for lower interest rates.

Example of a Risk:
Ravi applied for a personal loan without checking fees. He borrowed ₹2,00,000, but the bank charged a 3% processing fee upto ₹6,000. While he reduced his credit card interest rate, the upfront cost affected his savings.

How to Decide If Debt Consolidation Is Right for You

To know if this strategy works for you, ask yourself:

1. Can I get a lower interest rate? Compare rates between your existing debts and the personal loan.
2. Will I stay disciplined? Avoid taking on new debt after consolidating.
3. Are fees manageable? Look at processing fees, prepayment charges, and other costs.

A Balanced Approach

While debt consolidation is a helpful tool, it’s not a magic fix. Raj saved money and reduced stress, but he also had to:

• Set a budget to avoid overspending.
• Track expenses to prevent future debt.
• Pay on time to improve his credit score.

Conclusion

Those are long-term advantages in the future. Like Raj and Neha, a person saves money and time while also simplifying your financial life. Weigh all the pros and cons. Always compare interest rates and understand the fees involved, all while changing the habit that caused the debt, for successful outcomes. Debt consolidation can be employed productively for months in regaining control of your pocket and consequently long-term stabilized finances.