What is Debt Consolidation, and How Does it Work?
November 2, 2023

What is a Debt Cycle?

Molina Singh, an executive with a multi-national company, had just gotten a promotion with a raise in her salary. Feeling elated, she thought this was an occasion to celebrate and invited her colleagues to an exclusive restaurant for dinner. She was so excited with the news that she did not realise that she had already exhausted her budget for the month and decided to fund her celebrations with her credit card.

There were additional expenses, such as buying a new wardrobe, which was also paid with a credit card, before realising she had exhausted her limit, but that did not bother her as she would be earning more shortly. Molina was also paying the instalment for a home loan, so she decided to pay only the minimum due on her credit card bill.

The expected increment was delayed due to policy changes within the company, so Molina needed more funds and decided to take a Personal Loan to cover expenses. Unable to clear the credit card bills in the next few months, Molina found that her dues were now mounting with the credit she had taken and was just able to cover expenses.

The above is a characteristic example of how one can unwillingly find oneself with more credit than one is comfortable handling. This leads to a debt cycle in which the interest keeps mounting, and an individual finds it difficult to pay the obligated EMI or Credit Card dues—resulting in delays and default.

A salaried individual with a fixed monthly income must plan expenses, prioritising mandatory living expenses and then repaying credit dues. If the budget goes out of hand, credit repayment takes a secondary spot, and one is bound to miss out on paying an Emi for a mortgage, an unsecured loan, or a credit card bill on the due date.

How Does Debt Consolidation Work?

The first step towards debt consolidation is to take stock of the existing debts, recognise a problem and actively take steps to resolve it. Take comprehensive steps as there are no shortcuts to doing things correctly. With patience, planning and a consistent approach, there is a way out of a debt cycle.

Note all your current credit obligations, interest rates and the total EMI being paid. The primary outstanding debt to clear is the dues of all credit cards due to the high-interest rate chargeable.

Effects of a Delayed Credit Card Payment

A credit-free period of a month to 40 days is allowed by issuers to pay credit card spending; at the end of the cycle, a statement of the spending and the payment due date is generated.

The customer must ensure that the principal receives the payment on or before the due date, with a choice to pay the minimum due and transfer the balance to the next cycle. The following are the repercussions if the payment is not made timely:

  • A charge of 36% per annum is applicable on all unpaid usage.
  • A late payment charge is applied till the bill is cleared.
  • Overdue charges are levied if the credit limit is exhausted and payment is not made.
  • The delay in payment is reported to CIBIL.
  • The CIBIL score takes a dip.

Debt Consolidation for a Credit Card

Once the CIBIL Score is affected, it can affect the client’s prospects of acquiring further credit quickly: mishandling unsecured credit like a Personal Loan or a credit card is more of an issue. It directly affects the credit score and the heavy penalties. To avoid further damage, the following are the options:

  • Take immediate action before the debts increase, and your CIBIl Score is affected.
  • Stop using the credit card for further spending.
  • Pay the minimum due on the credit cards to avoid being declared a defaulter.
  • Convert dues to be paid to suitably equated EMI with a minimal interest.
  • Take advantage of credit card balance transfer offers that waive interest for three months.
  • Transfer the credit card debt to a Personal Loan, payable in easy instalments with a lower interest rate.
  • opt for a gold loan, a secure loan easily sanctioned by Banks such as HDFC Bank to pay the credit card bills.

What You Should NOT Do

  • Withdraw cash from your card unless funds are needed in a dire emergency, as cash has a daily interest charge.
  • Go for a credit card settlement at the behest of recovery agents, as the settlement will permanently mar your CIBIL record.
  • Never miss out on the minimum payment due for your credit card. Keeping the payment cycle is essential to maintaining a CIBIL score.

Looking for an easy way out is never a good choice, as it may seem. Although it is a temporary relief, it can magnify the problem further and hamper prospects of receiving credit in the future.

What are the Implications of Unpaid Unsecured Loan Dues?

Once the credit card debt is under control, check your current loans and their status. The unsecured Personal Loan EMI is presented to the salary account on a fixed date, most likely to be the month’s 1st,7th or 10th. The customer must ensure enough funds are in the account to clear the instalment. If the EMI is returned unpaid, the following happens:

Effects of an Overdue Loan EMI

  • A bounce is recorded in the Bank account statement.
  • The Loan track will depict the number of days of delayed payment.
  • The CIBIL history will also record a bounce and the number of days the EMI is unpaid.
  • Interest is charged daily for the delay by the lender.
  • No further credit is issued to the customer if there is an EMI bounce in the last three months.
  • The credit score of the customer is affected.

If there are insufficient funds in the account and the EMI is returned or bounces, the customer will get an alert for the same. If there is a slip and the EMI date has lapsed due to an emergency or forgotten because of other pressures, the customer must make amends immediately and pay the amount.

How Does Debt Consolidation for a Unsecured Loan work?

If you feel burdened with the EMI or defaulting on payments, take stock of all your existing Loans and what is the total EMI you are paying.

Primarily, tackle the Unsecure loan like a Personal Loan or a loan against a credit card, as a delay in payment will directly affect the CIBIL Score. However, the solution will depend on the type of loan you are operating and the terms of the Loan.

Loan Against a Credit Card

Banks issue small ticket loans based on an active credit card being used by account holders; the loan amount offered will depend on the limit of the card and the balance available in the account. A loan borrowed based on an existing card must be repaid promptly, as delays can quickly inflate the penalties.

The instalment for the loan is presented with the Credit Card Statement as a part of the bill that needs to be paid on the due date.

  • Interest will be charged on the unpaid dues, including the EMI amount @ interest rate of 36% per annum.
  • Additionally, late payment and overdue charges are applicable.

A Loan amount taken on behalf of a Credit Card can easily mount debts a customer paying minimum due is unaware that the original amount remains unpaid and plays a vital role in leading to a debt cycle.

Banks such as Axis Finance Limited allow the transfer of a Credit card debt to a Personal Loan, which can be conveniently repaid in equated instalments at half the interest.

Personal Loan Outstanding

A Personal Loan is funding received for personal usage and emergency needs from Banks and NBFCs such as HDFC Bank and NBFCs like Tata Capital.  A Personal Loan is a short-term Loan with a Tenure extending from 12 to 60 months, disbursed within 72 hours.  Therefore, an applicant is tempted to apply for multiple Personal loans.

In the event of financial pressures or delays and defaults in payment of the instalment and the budget seems unaffordable, the following can help to get you back on track:

  • If your Personal Loan is running at a high interest rate look for an alternate lender to initiate a Balance Transfer. Lenders issue the lowest interest rates for Personal Loan transfers, running successfully from an alternate Bank. Banks like ICICI Bank process the transfer of multiple loans and consolidate them under a single EMI.
    • Apply for a Top-Up on your existing loan and rework the Tenure. With a Personal Loan Top Up, the applicant can receive the surplus funds required to pay pending EMI and clear Credit card payments.
  • The tenure of the existing loan can also be extended for a lower EMI and make it affordable. Before applying, use an EMI Calculator that can help you calculate a suitable EMI within your budget.

Secure Loans Outstanding for Home Loans, Mortgages, Auto Loans and Gold Loan

Credit is freely available as a secure loan for lifestyle needs salaried persons and entrepreneurs fulfil their ambitions and dreams of owning a home, driving their own vehicle or starting a new venture.

Loans such as Auto loans, gold loans or a mortgage are secured loans in which the bank has a lien to the property given as a security. The security safeguards the lender’s interest, and the loan is commissioned based on the security deposited.

Banks and NBFCs market secure loans at attractive terms and interest rates they expect the customer to be responsible for repayment and enjoy the facilities offered. Therefore, the customer’s prerogative is to ensure sufficient funds are in the account to support the EMI.

If the EMI is not Deposited in a Timely Following are the Repercussions:

  • Interest will be charged on the number of days for which the payment is delayed. Charges will be daily, so it is in the customer’s interest to make the payment immediately.
  • The aberration will be reported to CIBIL (Credit Bureau of India Ltd) by the lender with details of the number of days for which the payment is delayed.
  • The bounce or delayed payment will be reflected in the applicant’s loan track and the applicant’s credit record. In case of excess bounces, the CIBIL Score is affected.
  • An applicant with a lower credit score or a history of delays and defaults is unlikely to get further credit quickly or a higher interest rate when applying for additional credit.

Putting the security given to the Bank at risk is a situation to avoid at all costs. Though a financial crunch can put payments behind and create a debt cycle, rectifying the situation as soon as possible is essential. The following can help in the consolidation and relieving of your debt.

  • Take a top-up on your existing loan beforehand if additional funds are required, as if the EMI is returned it may not be feasible to get additional funds for the next three months.
  • Restructure your loan for a longer tenure and get a lower EMI to suit your budget: a secure loan is issued at the lowest interest rate, making it the best choice for getting funds when needed. Your home loan or Auto loan can be refinanced to bring you the additional funds required for liquidity and to clear existing debts.
  • A mortgage is offered at a floating rate, levied as per the PLR of the Reserve Bank of India. If the rate increases, an individual can apply to an alternate lender offering a lower EMI.

What are the Actions to Avoid?

  • When in debt, do not apply for further credit, as your request will be rejected due to being over leveraged.
  • Do not apply indiscriminately for further credit, as it will reduce your CIBIL Score further.
  • Please do not go in for short-term resolutions that offer credit at higher rates to escape the current issue, as it will lead to further debt.
  • Avoid dealing with agents who ask for funds to help resolve your issues, as their promises have no truth.


As far as possible, be sure you can afford the payback before accepting credit and make credit obligations an essential part of the monthly budget. If an untoward circumstance does happen, do not sweep the problem under the carpet. It will only aggravate and lead to further debts.

There is no tailor-made solution for Debt Consolidation, and it has to be handled according to the customer’s situation and the debt’s nature. If the financial crunch is short-term, it is best to clear all dues once sufficient finances are in hand. If finances are constricted, working out a comprehensive plan will slowly but surely lead you to financial stability.

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