Imagine you have a total credit card debt of ₹2,50,000. With an interest rate of 24%, your monthly interest is around ₹5,000, making it hard to pay down the principal. Debt consolidation can offer relief.
Here’s how: By combining all debts into a single loan at a lower rate—say, 12%—your monthly interest drops to ₹2,500. That’s half of what you were paying before!
Debt consolidation is a popular debt relief solution, but it’s not the only one. A consumer proposal is another option that can help. But how do these two methods stack up? Let’s break it down.
What is Debt Consolidation?
Debt consolidation combines all your debts into one. For instance, you owe ₹1,00,000 on a personal loan at 18% interest, ₹50,000 on a credit card at 24%, and another ₹1,00,000 on a car loan at 12%.
Combining these into a single loan with a 14% interest rate means a manageable monthly payment and lower interest over time. But is it for you?
Debt consolidation benefits people who want a clear path out of debt without damaging their credit score. However, it doesn’t reduce the amount you owe, only your interest rate. On the other hand, a consumer proposal can reduce the total debt amount, but it affects your credit score.
Debt Consolidation vs. Consumer Proposal: Which Costs Less?
| Type | Total Debt | Monthly Interest | New Interest Rate | Monthly Savings |
| Original Debts | ₹2,50,000 | ₹5,000 | 24% | ₹0 |
| Debt Consolidation | ₹2,50,000 | ₹2,500 | 12% | ₹2,500 |
| Consumer Proposal | ₹1,50,000 | ₹0 (Frozen) | 0% | ₹5,000 |
In a consumer proposal, you may negotiate to pay back ₹1,50,000 of your total debt over a fixed period. Monthly payments are often lower, and interest is usually frozen, which helps those struggling to make payments.
Yet, a consumer proposal impacts your credit score more significantly than debt consolidation.
Pros and Cons of Debt Consolidation
Debt consolidation can be a good choice if you have a steady income. Here are the pros and cons:
- Pros:
- Lower interest rates mean you pay less over time.
- Simplified payments—one monthly payment instead of multiple.
- It improves your credit score when paid on time.
- Cons:
- You need a good credit score to qualify for the best rates.
- It doesn’t reduce the debt amount, only the interest.
- May include processing fees, which add up.
Who Should Choose Debt Consolidation?
Debt consolidation works best for those with multiple loans and a stable income. If you have a job that brings in ₹50,000 monthly, and your debt obligations equal ₹20,000, consolidating to a single payment of ₹15,000 could ease your monthly burden.
This option works if you can manage consistent payments and aim to keep your credit score intact.
But if your debt feels overwhelming, a consumer proposal may be a better fit since it reduces the total owed amount. The catch? It leaves a longer-lasting impact on your credit score, making debt consolidation the first choice for those who qualify.
Conclusion
When deciding between debt consolidation and a consumer proposal, ask yourself: Can you commit to a structured repayment plan?
Debt consolidation could be the answer if you’re looking for a way to lower interest rates and simplify your finances without damaging your credit score. So, what matters more to you—saving on interest or cutting down your debt?
FAQs
- What’s the main benefit of debt consolidation?
It lowers your interest rate and simplifies payments. - Will debt consolidation affect my credit score?
No, as long as you make timely payments. - How much can I save with debt consolidation?
It depends on your current interest rates, but savings can be substantial. - Is debt consolidation better than a consumer proposal?
It’s better if you want to maintain your credit score and have a stable income.