Personal Loan vs Debt Consolidation Loan: Which Option is Better for Multiple EMIs?
Keeping track of your Equated Monthly Installments (EMIs) can become too stressful, especially when you have multiple credit cards, home appliances on an installment plan, and personal loans. It is not uncommon for people to have to split their payments between several credit cards or banks, paying off different amounts at different intervals. This can be incredibly taxing on your finances and monthly budget.
When large payments become due, there are two of the most common options that you can go for: applying for a new personal loan or consolidating your debt. Even though both are so similar in nature, they have many differences that should be taken into account before making any decisions.
Understanding the Basics
To make the right decision, it is important that we know how each financial product operates.
What is a Personal Loan?
A personal loan is an unsecured loan that is provided by banks and financial institutions. There is no collateral attached to it. You borrow a lump sum amount that you repay in installments over a period of time. You can use this loan for any purpose.
What is a Debt Consolidation Loan?
A debt consolidation loan is basically a personal loan that you get to pay off your other loans. Ideally, this new loan would have a lower interest rate or an added tenure, thus resulting in a single EMI that is lower in amount.
Key Differences: Personal Loan vs Debt Consolidation Loan
You should know that no matter what option you choose, you will get the money to clear your debt, but it is important to understand the difference between these two products to make the right choice:
| Feature | Personal Loan | Debt Consolidation Loan |
| Primary Purpose | General financial needs (expenses, purchases, emergencies) | Specifically clearing multiple existing debts |
| Disbursement | Funds credited directly to your bank account | Often paid directly to your existing lenders by the new lender |
| Interest Rate Target | Standard interest rate based on your credit profile | Targeted to be lower than the average of your existing debts |
| EMI Structure | Adds a new EMI to your existing monthly obligations | Replaces multiple EMIs with just one single EMI |
Which Option Works Best for Multiple EMIs?
If you want to decide which option to choose from, it would depend upon your overall debt structure, interest rates, and financial habits.
1. Evaluate Total Interest Rates
If your current EMI's are from high-interest debts like Credit Card dues, which carry an interest rate as high as 36-42%, then definitely a debt consolidation loan is the better option as compared to a personal loan. By consolidating your three credit card dues into a single personal loan at 12-15%, you save a lot of money on the high rate of interest and also save thousands of rupees.
2. Streamline Your Cash Flow
Missing an EMI payment can damage your credit score or CIBIL, and it also means that you will have to pay heavy late fees. If your biggest problem is juggling numerous due dates across the month, consolidating them into one EMI on a fixed date in a month can make your life exponentially easier.
3. Check for Prepayment Penalties
Before taking out a new loan to close old ones, review the terms of your existing loans. Some lenders charge prepayment or foreclosure penalties (usually 2% to 5% of the remaining principal balance). If foreclosure fees on your current loans outweigh the interest savings of a new loan, consolidation might not be financially beneficial.
How to Test Your Strategy Before Applying?
Before applying for any new credit, run the numbers yourself. This is where using a personal loan calculator or online EMI calculator comes in handy.
Here's how to approach the situation:
- Calculate total current EMIs: Figure out how much you pay every month and add up all the numbers to find the total amount you spend on your loans every month.
- Determine total outstanding principal: Sum up the total remaining balance across all your active loans and credit cards.
- Use an EMI calculator: Input your total outstanding principal into an online personal loan calculator. Adjust the interest rate and tenure to see what your new single EMI would look like.
If the calculated single EMI is lower than the sum of your existing EMIs, and the total interest cost over time is reduced, proceeding with consolidation makes clear financial sense.
Final Thoughts
If you just have one or two manageable EMIs at manageable interest rates, taking up a standard personal loan could only add unnecessary clutter to your repayments.
However, if you are facing too many EMIs, credit card roll-overs, and due dates, going with a debt consolidation option in the form of a personal loan is a much smarter and cheaper alternative. It will help relieve you of the stress of having multiple creditors and restore the financial freedom that you thought you had lost forever.
So, when you are prepared to take this step towards financial freedom, open up your browser and search for online lending platforms like Finnable, which can help you get a personal loan in India and help you consolidate all your debts.
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