How is interest calculated on a debt consolidation loan?

The interest on a debt consolidation loan is calculated based on the outstanding principal balance. Unlike other types of loans, the interest rate on a debt consolidation loan is fixed for the entire tenure. This means your monthly instalments towards principal and interest will remain the same till the end of the loan period.

The interest component is calculated by applying the annual interest rate to the reducing principal amount every month. For example, if you take a ₹10 lakh debt consolidation loan at 10% annual interest for 5 years, the monthly interest in the first month will be ₹10 lakh * 10%/12 = ₹8,333. In the second month, it will be slightly lower as the principal reduces. This continues till the end of the 60-month period.

Overall, the total interest payable is the sum of monthly interest amounts calculated on the outstanding principal balance. The longer the tenure, the higher the total interest outgo, although the equated monthly instalment is lower. Hence, opting for a shorter tenure can help reduce the overall interest cost on a debt consolidation loan.