The Impact of Debt Consolidation on Loan Eligibility

You have three loans. A personal loan of ₹1,50,000 at 14% interest, a credit card debt of ₹80,000 at 36%, and a vehicle loan of ₹2,00,000 at 11%. Combined, your monthly EMI comes to ₹27,000. You’re struggling to keep up.

What if you could combine all these debts into one loan at 12% interest? Now, your monthly EMI is reduced to ₹20,000. That’s a saving of ₹7,000 every month! This process is called debt consolidation, and it can be a game-changer. But how does it affect your chances of getting a new loan?

In India, maintaining a credit score above 750 is generally considered good and can improve your chances of securing new credit. 

Let’s see how it impacts loan eligibility.

What Is Debt Consolidation?

Debt consolidation is when you combine multiple debts into one. This could be through a personal loan, balance transfer, or home loan top-up.

Let’s take an example. Suppose you owe ₹4,00,000 across three loans. If you consolidate them into a single loan of ₹4,00,000 at a lower interest rate, you’ll have one EMI instead of three.

But is this enough to get a new loan? Lenders look at your credit score, repayment history, and debt-to-income ratio.

Here’s a table to break it down:

This reduced EMI increases your disposable income. Lenders see this as a positive.

How Does Debt Consolidation Impact Your Loan Eligibility?

Debt consolidation can affect loan eligibility in two ways:

• Short-Term Impact: Initially, your credit score might drop. Why? The lender makes a hard inquiry.
• Long-Term Benefit: Over time, your score improves if you pay consistently.

Here’s what helps:

• Lower EMI reduces your debt-to-income ratio. For instance, if your monthly income is ₹50,000 and EMI drops from ₹27,000 to ₹18,000, your ratio changes from 54% to 36%.
• Better repayment history increases your creditworthiness.

The Pros and Cons of Debt Consolidation

Pros

• Simplified Payments: One EMI is easier to manage.
• Reduced Interest Costs: Lower rates save money over time.
• Improved Eligibility: Better financial discipline attracts lenders.

Cons

• Fees and Charges: Processing fees or prepayment penalties.
• Risk of Overspending: Clearing old debts might tempt you to borrow more.

Maximise Your Loan Eligibility After Debt Consolidation

Here’s how to improve your chances:

• Pay every EMI on time. Even one delay can hurt your credit score.
• Don’t apply for multiple loans right after consolidating.
• Keep your credit utilisation low—below 30%.

For example, if you have a ₹1,00,000 credit limit, don’t use more than ₹30,000.

• Monitor your credit score regularly. Apps like CIBIL or Experian can help.
• Avoid taking a higher loan than you need.

Conclusion

Debt consolidation simplifies your finances. But remember, it’s not a magic wand. You must use it wisely. Plan your finances and avoid overspending.

Indians who consolidate debt may see improved loan eligibility within a year. Will you take the next step to manage your debt?

FAQs

1. Can I apply for a loan immediately after consolidating debt?
   No. Wait 3-6 months to show consistent payments.
2. Does debt consolidation improve my credit score?
   Yes, over time, if you pay EMIs on time.
3. What’s the best method for debt consolidation in India?
   Personal loans or balance transfers are popular.
4. How much debt can I consolidate?
   It depends on your income and repayment capacity.