Personal Loan for Debt Consolidation: Best Ways to Combine Debts

Debt consolidation refers to the practice of availing a new loan, typically at a lower interest rate, to pay off multiple ongoing debts. These debts could include your car loan, credit card outstanding, an existing personal loan, or any other kind of high-cost debt. You can use a secured or unsecured loan for debt consolidation. This strategy may be favorable in terms of lower interest rates, improved loan tenure, reduced EMI, and streamlined loan management.

Since you only have to repay one loan, there is a significantly lesser chance of missing payment due dates and incurring penal charges under the RBI's Fair Practices Code, which mandates that penalties for non-compliance with loan terms must be levied as 'penal charges' and not as 'penal interest'.

What is a Debt Consolidation Loan?

A debt consolidation loan is a type of loan that allows borrowers to consolidate multiple debts into a single loan. The borrower takes out a new loan with a lower interest rate and uses the funds to pay off their existing debts. This can help to simplify the repayment process by reducing the number of monthly payments that need to be made and by providing a lower interest rate.

Loans to consolidate debt are available from a variety of lenders, including financial institutions, credit unions, and online lenders. The amount of the loan will depend on the borrower's creditworthiness and the total amount of debt that needs to be consolidated. In general, lenders will require a good credit score and a stable income to qualify for a debt consolidation loan.

Why Use Personal Loans for Debt Consolidation?

Managing multiple debt obligations ranging from high-interest credit card dues to various retail loans often leads to a "debt trap." A personal loan for debt consolidation is a strategic financial tool used to pay off all existing high-cost debts and replace them with a single, structured EMI.

In the current financial landscape, this approach is recommended because:

• Interest Savings: Credit card APRs in India often range between 42% and 45%. Shifting to a personal loan can reduce your interest burden by more than half.
• Credit Score Protection: Under RBI’s Fair Practices Code, missing a single payment leads to penal charges. Consolidating into one payment minimizes the risk of oversight.
• Psychological Relief: Replacing 5 - 6 due dates with one single date reduces financial anxiety and simplifies monthly budgeting.

Best Ways to Combine Debts Using a Personal Loan

Consolidating your liabilities is not just about taking a new loan; it is about strategic financial restructuring. Here are five practical ways to execute this with Hero FinCorp.

1. Audit Your Current Debt Portfolio

Before applying, create a comprehensive list of every active repayment. You must document:

• Total Outstanding Balances: The exact amount required to close each account today.
• Current Interest Rates: Identify "toxic" high-interest debts like credit cards (often 42%+ APR).
• Existing Tenures: Note how many months remain for each loan.

Expert Tip: This audit helps you determine the exact loan quantum you need, ensuring you don’t over-borrow.

2. Compare Offers Using the APR (Annual Percentage Rate)

Don’t just look at the advertised interest rate. Per RBI’s transparency mandates, lenders must provide a Key Fact Statement (KFS).

• Look for the APR: This includes the base interest rate plus processing fee and charges.
• Hero FinCorp Edge: We offer transparent, relationship-based rates for existing customers, ensuring your "Cost of New Credit" is mathematically lower than your current debt average.

3. Align Your EMI with Your Cash Flow

The "best" loan isn't always the one with the lowest EMI.

• The Tenure Trap: Extending your tenure to 60 months might make the EMI affordable, but you could end up paying double the interest.
• The Strategy: Use our Personal Loan EMI Calculator to find a "sweet spot" a tenure (e.g., 24–36 months) where the EMI is manageable without unnecessarily inflating the total interest outgo.

4. Maintain Strict Credit Discipline

A personal loan for debt consolidation is a tool for closure, not a license for fresh spending.

• Immediate Settlement: Once the funds hit your account, prioritize paying off your high-interest creditors within 24 hours.
• Avoid "Credit Creep": Do not use the newly cleared credit card limits for fresh expenses. The goal is to reduce your total Debt-to-Income (DTI) ratio.

5. Formalize Account Closures

Closing a debt is not complete until it is reflected in your credit history.

• Request NDCs: Always obtain a No Dues Certificate (NDC) from your previous lenders.
• Monitor Your Score: Under RBI’s Credit Reporting Reforms, bureaus now update records every 15 days. Check your CIBIL report a month after consolidation to ensure all old accounts are marked as "Closed" or "Settled."

Features and Benefits of a Debt Consolidation Loan

Choosing a regulated NBFC like Hero FinCorp offers specific advantages for borrowers in 2026:

• High Loan Quantum: Access loan up to ₹5 Lakh to cover multiple liabilities in one go.
• Instant Approval: Get a digital sanction in as little as 10 minutes via our paperless app.
• Collateral-Free: No need to pledge gold or property; the loan is based on your income and credit profile.
• Transparent KFS: Receive a Key Fact Statement (KFS) detailing the all-inclusive cost (APR) before signing, as per RBI Mandate.

Documents Required for Debt Consolidation Loans

For a personal loan for debt consolidation, Hero FinCorp requires minimal, digital-first documentation:

• Identity & Address Proof: PAN Card (Mandatory) and Aadhaar Card.
• Income Proof (Salaried): Last 3 months’ salary slips and 6 months’ bank statements of the salary account.
• Income Proof (Self-Employed): Income Tax Returns(ITR) for the last 2 years and business existence proof.
• Photographs: A live selfie taken during the digital application process.

Interest Rates, Fees and Charges for Debt Consolidation Loans

As starting of the year, with the Repo Rate at 5.25%, Hero FinCorp offers competitive and transparent pricing:

Eligibility Criteria for Debt Consolidation Loans

To qualify for an instant debt consolidation loan, you must meet the following:

• Age: 21 to 58 years.
• Citizenship: Resident Indian.
• Minimum Income: ₹15,000 per month.
• Work Experience: 6 months for salaried; 2 years for self-employed.
• Credit Score: A CIBIL score of 725 or above is preferred for the best rates.

How to Apply for a Debt Consolidation Loan Online

1. Check Eligibility: Use our online Personal Loan Eligibility Calculator to see how much you can borrow to consolidate debt.
2. Fill Application: Provide basic professional and personal details on the Hero FinCorp app.
3. Digital KYC: Complete your verification via Video KYC or Aadhaar-based OTP.
4. E-Mandate & Disbursal: Sign the loan agreement digitally and set up an auto-debit (e-NACH). The funds are usually disbursed within 24 hours.

Things to Watch Out for Before You Consolidate

• The "Long-Term" Trap: While a longer tenure reduces monthly EMIs, it significantly increases the total interest paid. Ensure your debt-free timeline doesn't stretch longer than necessary, costing you more in the long run.
• Impact of "Hard Inquiries": Each loan application triggers a "Hard Inquiry" on your CIBIL report, causing a temporary 5–10 point dip. Multiple applications in a short window can signal credit hungriness to lenders.
• Hidden Costs: Never rely solely on advertised interest rates. Per RBI’s mandates, always check the Annual Percentage Rate (APR) in your Key Fact Statement (KFS) for the all-inclusive cost.

Common Mistakes People Make with Debt Consolidation

• Racking Up New Debt: The most dangerous mistake is using cleared credit cards for new purchases. Without lifestyle changes, you risk doubling your debt juggling both the new personal loan and new card dues.
• Ignoring the Source of Debt: Consolidation only treats the "symptom" of debt. Without a strict budget to address overspending habits, you may find yourself in the same financial distress within a few months.
• Not Comparing APRs: Borrowing at a 22% APR to settle a 20% loan is a financial loss. Always ensure the total cost of the new loan is mathematically lower than your current debt.
• Missing the First EMI: Consolidation loans often have different due dates than previous debts. Failing to fund your account for the first new cycle can severely damage your credit score immediately after consolidation.

Conclusion

Consolidating debt via a personal loan is a powerful strategy to regain financial freedom. By replacing high-interest liabilities with a single, lower-cost EMI, you simplify your path to becoming debt-free. However, success depends on strict credit discipline, comparing APRs, and adhering to a structured repayment plan to secure your long-term financial health.

Frequently Asked Questions (FAQs)

Will A Debt Consolidation Loan Affect My Cibil Score?

Initially, you may see a temporary dip of 5–10 points due to the "Hard Inquiry" made by the lender. However, in the long term, your score typically improves as you lower your Credit Utilization Ratio (CUR) on credit cards and build a consistent repayment history.

Can I Consolidate My Credit Card Debt Into A Personal Loan?

Yes. In fact, this is one of the most effective uses of a personal loan for debt consolidation. It allows you to shift from high-interest revolving credit (often 42%+) to a structured term loan with a much lower interest rate and a fixed end date.

Is There A Penalty For Paying Off My Consolidation Loan Early?

As per RBI’s January guidelines, no foreclosure or prepayment charges can be levied on floating-rate personal loans sanctioned to individual borrowers. For fixed-rate loans, a nominal fee (typically up to 5% + GST) may apply as per your Key Fact Statement (KFS).

How Much Can I Borrow To Consolidate Debt With Hero FinCorp?

You can borrow up to ₹5 Lakh depending on your income, repayment capacity, and credit profile. We recommend calculating your total outstanding debt first to ensure the loan amount covers all your high-cost liabilities.

What Is A Key Fact Statement (KFS) And Why Is It Important?

The KFS is a standardized document mandated by the RBI that every lender must provide before you sign the loan agreement. It explicitly lists the Annual Percentage Rate (APR), which includes interest and all fees, ensuring there are no hidden costs.

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