Having several loans running at the same time can make your monthly finances harder to manage. One EMI goes out for a personal loan, another payment is due on a credit card, and there may be smaller loan instalments in between. None of these payments may seem unmanageable on its own, but together they can make it difficult to see where your money is going.

A personal loan for debt consolidation is one way of bringing some of these repayments together. You take a new loan and use it to clear eligible existing debts, leaving you with one EMI to manage.

That sounds simple, but there is some calculation involved. A new loan is not automatically cheaper just because it gives you one EMI. The interest rate, processing fee, tenure and charges for closing your existing loans can all change the final cost.

Debt Consolidation: How It Fits Your Situation

Debt consolidation means using one loan to repay two or more existing debts. Once those debts are cleared, you make repayments on the new loan instead of continuing with several separate obligations.

Take a simple example. You might have a credit card balance, an existing personal loan and a consumer loan. You currently have three different repayment dates and three different balances to keep track of. With a consolidation loan, the outstanding amounts can be brought together into one borrowing arrangement, subject to the lender's terms.

The reason is mainly practical. You have one EMI, one due date and one loan account to keep an eye on.

There can also be a financial benefit where the new loan carries a lower applicable interest rate than some of the debts being replaced. This is particularly relevant when a large part of the outstanding debt comes from high-interest credit card balances.

However, consolidation is not a shortcut to getting out of debt. You are still borrowing money. The decision needs to be based on what the new loan will cost and whether the EMI fits your monthly budget.

How Does a Personal Loan Help With Debt Consolidation?

The first thing to do is find out exactly how much you owe.

Suppose you have ₹2 lakh outstanding across a personal loan and two credit cards. Do not simply apply for a ₹2 lakh loan and assume that is the amount required. Check the current outstanding balances with each lender. If any existing loan has a foreclosure charge, include that in your calculation as well.

You can then compare the amount required with the personal loan amount you may be eligible for.

If the loan is approved and disbursed, the money can be used to clear the debts included in your plan. Once those accounts have been settled, the repayments are replaced by the new personal loan EMI.

That can make a noticeable difference to day-to-day money management. Instead of remembering several payment dates, you have one.

The interest calculation needs a little more attention. If the new loan has a lower rate, you may reduce the interest cost on some of your existing debt. But extending the repayment over a much longer period can increase the total interest paid. The EMI may look smaller while the overall cost is higher.

So the comparison should always be between the total cost of the existing debt and the total cost of the new loan, not just the monthly instalment.

Which Debts Can You Consolidate?

A personal loan may be used to repay different types of eligible unsecured debt, depending on the lender's policy.

The word eligible matters here. A lender may not treat every existing liability in the same way.

Before applying, get the latest outstanding amount from each lender. This gives you a realistic figure for how much you need to consolidate multiple loans rather than borrowing an amount based on old figures.

When Should You Consider Debt Consolidation?

You do not need to have a certain number of loans before debt consolidation becomes worth considering. Sometimes the issue is not the number of loans but the cost of the debt.

For example, a borrower carrying a large credit card balance at a relatively high interest rate may benefit from moving that balance to a lower-cost loan. Someone else may simply be struggling to keep track of several EMIs and wants a repayment structure that is easier to follow.

Some signs that it may be worth looking at your options are:

• You have several repayment dates to remember each month.
• High-interest credit card debt makes up a large part of what you owe.
• Your existing EMIs leave little room in your monthly budget.
• You have started using one credit facility to manage another.
• You are finding it difficult to keep track of outstanding balances.
• You would be more comfortable with one fixed repayment schedule.

These signs do not mean that you should automatically take another loan. First, look at your income, expenses and outstanding debt together. If the existing repayments are already unaffordable, replacing them with a new EMI may not address the underlying problem.

Steps to Consolidate Your Debt With a Shriram Personal Loan

There is no need to make the application the first step. Do the calculation before you approach a lender.

1. Write down what you owe.
 List every loan or credit balance you want to clear. Note the outstanding amount, EMI, interest rate and remaining tenure.

2. Find the actual closure amount.
 Ask your existing lenders how much you would need to pay to close the selected accounts. This can be different from the outstanding principal because applicable charges may be added.

3. Decide how much you need to borrow.
 The new loan should be based on the amount required to clear the debts you have identified. Borrowing extra increases the repayment obligation.

4. Check your credit profile.
 Review your credit report before making an application. If there is an error, getting it corrected beforehand is better than discovering it during the loan process.

5. Compare the new loan properly.
 Look at the interest rate, processing fee, tenure and applicable prepayment or foreclosure terms. Calculate the total amount you would repay over the new tenure.

6. Apply once you are comfortable with the numbers.
 Submit the application and the required documents. The lender will assess your eligibility and repayment capacity.

7. Clear the existing debts.
 Once the loan is disbursed, use the funds for the debts you planned to close. Keep payment records for each account.

8. Confirm that the old accounts are closed.
 Get the relevant closure or no-dues confirmation. Later, check that the closed accounts have been updated correctly in your credit report.

After that, the focus shifts to the new EMI. The whole point of consolidation is lost if the old balances are cleared only to be built up again.

Debt Consolidation vs Balance Transfer

The two options are related, but they solve slightly different problems.

A loan balance transfer may make sense when one existing loan has an expensive interest rate and another lender offers more suitable terms.

Debt consolidation is broader. It is considered when several debts need to be brought together rather than simply moving one loan from one lender to another.

A Debt Consolidation Example

Suppose your current monthly payments look like this:

You could explore a personal loan to clear the outstanding balances, subject to eligibility and the terms of the existing loans.

After consolidation, you would have one EMI instead of three. The new EMI could be lower than ₹20,000, but that is not enough to conclude that you are saving money.

The actual EMI depends on the loan amount, applicable interest rate and tenure. You also need to account for processing fees and any charges involved in closing the old loans.

Use the figures to compare both options before deciding. The goal is a repayment structure that is easier to manage without increasing the total cost unnecessarily.

Mistakes to Avoid When Consolidating Debt

A few mistakes can undermine an otherwise sensible consolidation plan.

• Do not borrow more than you need. Extra borrowing means extra interest.
• Do not select the loan simply because it offers the lowest EMI. Check the total repayment over the full tenure.
• Do not ignore foreclosure charges on your existing loans. Find out the closure amount before deciding how much to borrow.

And once the old debts are cleared, do not immediately start spending against the credit that has just been freed up. That can leave you with the new personal loan as well as a fresh credit card balance.

Finally, keep the closure documents for your records and check that the old accounts are reported as closed.

Who Should Consider a Personal Loan for Debt Consolidation?

A personal loan may be worth considering if you have multiple eligible debts, are carrying high-interest credit card balances or simply find several monthly repayments difficult to manage.

It can also suit someone who has a stable income and can comfortably handle the new EMI but wants a cleaner repayment structure.

It may not be the right option if your current debt is already beyond what your income can support. In that situation, taking another loan without addressing the cash-flow problem can make things worse.

FAQs

1. Can I use a personal loan to pay off credit card debt?

A personal loan may be used to repay eligible credit card debt, subject to the lender's terms and your eligibility. Compare the cost of the new loan with the interest and charges on the existing card balance.

2. Is debt consolidation good for my credit score?

There is no guaranteed improvement. A new loan application may have a short-term effect on your credit profile. Consistently paying the new EMI on time and avoiding fresh high-cost debt can support healthier credit behaviour over time.

3. Can I consolidate multiple personal loans?

Multiple eligible personal loans may be consolidated through a new personal loan, subject to the lender's assessment and the closure terms of the existing loans.

4. What is the difference between refinancing and debt consolidation?

Refinancing generally means replacing an existing loan with another loan, often on different terms. Debt consolidation specifically involves bringing multiple debts together into one repayment arrangement.

5. Does debt consolidation reduce interest costs?

It can, but there is no automatic saving. Compare the new interest rate, processing fee, foreclosure charges, tenure and total repayment with the cost of your existing debts.

6. What documents are required?

The exact requirements vary by lender and applicant. Identity and address proof, income-related documents and details of the existing loans may be required.

7. Is there any foreclosure charge?

A foreclosure charge may apply when an existing loan is closed before its scheduled end, depending on the lender and applicable loan terms. Check the amount before finalising your consolidation calculation.

8. Can I prepay my personal loan?

Prepayment or foreclosure may be available subject to the applicable loan terms and charges. If you expect to repay the loan early, check these conditions before choosing the loan.