I’m planning to take a debt consolidation loan (around ₹2–3L) to combine a few credit card dues. One lender is charging 2.5% + GST as a processing fee, which feels a bit steep.
Is this the standard rate, or are there banks/fintechs that offer lower processing fees? Also, are there any hidden charges I should watch out for?
What Is Debt Consolidation? It is the least discussed topics over the internet lets create the Holy Bible over the topic of Debt consolidation here at finonja community
What Is Debt Consolidation?
When you combine your multiple loans into a single loan, this process is called debt consolidation. Most of the individuals do it to decrease rates of interest and simplify repayment.
You will pay only to one lender instead of paying too many. It sounds simple. However, the financial impact depends on the rate of interest, repayment period, and how you manage the new loan.
Pros Of Debt Consolidation
If you are handling too many EMIs then debt consolidation will make you feel relieved. It will help you in decreasing monthly outflow and improve financial planning.
An example showing before vs after consolidation:
| Details | Before Consolidation | After Consolidation |
|---|---|---|
| Number of Loans | 5 | 1 |
| Total of Monthly EMI | ₹48,000 | ₹32,500 |
| Range of Rate of Interest | 18% to 36% | 12.5% to 14.5% |
| Tenure Left | 2 to 3 years | 4 years |
| Total Interest Paid | ₹2.1 lakh | ₹2.6 lakh |
Your monthly savings will be ₹15,500, but in the long run, you will end up paying ₹50,000 more.
Lower EMI, But Higher Cost?
With a longer repayment period you might be able to reduce your EMI but it will increase the total interest paid. The savings you see each month might come at a hidden price.
Let’s see the comparison of interest over different tenures:
| Amount of Loan | Rate of Interest | Tenure | EMI | Total Interest Paid |
|---|---|---|---|---|
| ₹4,00,000 | 13% | 2 years | ₹19,042 | ₹57,000 |
| ₹4,00,000 | 13% | 4 years | ₹10,800 | ₹1,18,400 |
Here we can see that by paying approx. ₹8,200 less per month, you have to pay ₹61,400 extra overall.
Hidden Charges You Might Miss
| Type of Charge | Common Range | Example (₹5 Lakh Loan) |
|---|---|---|
| Processing Fee | 1% to 2% | ₹5,000 to ₹10,000 |
| Prepayment Fee | 2% to 4% of balance | ₹10,000 to ₹20,000 |
| Loan Insurance | ₹2,000 to ₹6,000 | ₹4,500 typical |
| EMI Bounce Charge | ₹500 to ₹1,000 per EMI | Depends on delay |
Even small charges can add up over time. Before signing you must always check the fine print.
Positive Impact On Credit Score
Your credit score will improve when you miss no or fewer EMIs. Consolidation is helpful for you if your problem is not overspending but disorganisation.
Rita missed a few EMIs and her credit score was 615. She opted for consolidation and started paying on time.
After 10 months her credit score increases to 725. This also helped her in getting a better rate later for a home loan.
When Should You Avoid It?
If you are looking for a magical solution, then consolidation is not for you. It can backfire if:
- You fail to repay the new loan properly.
- You choose a very long tenure to get low EMIs.
- You start spending again on cleared credit cards.
A few months back Freddy consolidated his debt. However, he didn’t close his old credit cards. So within 8 months, he was back in the debt trap with more loans.
Emotional Relief Vs Financial Benefit
You must always look at the total repayment cost. A lower EMI might bring some emotional comfort, but in the long run it might not be a good deal for you.
Let’s look at a comparison between monthly relief and total cost:
| Option | EMI | Tenure | Total Repaid | Financial Outcome |
|---|---|---|---|---|
| No Consolidation | ₹47,500 | 2 years | ₹11.4 lakh | Cost-efficient |
| Consolidation | ₹31,800 | 4 years | ₹15.2 lakh | More expensive |
What To Check Before Choosing A Lender?
| Feature | Good Range |
|---|---|
| Rate of Interest | Between 10.5% to 14% annually |
| Processing Fee | Below 2% |
| Prepayment Charges | Nil to 2% |
| Loan Disbursal Time | Within 2 to 3 working days |
| Consumer Service | Responsive and helpful |
Final Thoughts
You will be able to reduce your EMI using debt consolidation. But if you stretch your repayment tenure too much then you might end up paying more cost.
Do not just go for monthly savings that look good at first, you must calculate the long-term cost before deciding anything.
Hidden fees, longer tenure, and relaxed discipline might turn this option into a financial burden over time.
If used carefully and with planning, it can be a very helpful tool for you. You must take your time to read every document before signing anything.
Do your own math before acting up on anything.
FAQs
1. Will debt consolidation help me save on interest?
Only if the new interest rate is much lower than your current rates.
2. Is there any government support for debt consolidation?
There is no specific program, but public sector banks may offer you better loan rates.
3. Can I close my loan early without penalty?
Some lenders allow early closure without extra charge after a few EMIs.
4. What happens if I miss EMI on a consolidated loan?
Late fees will be applicable, and your credit score will drop sharply.