Debt Consolidation: Combining Loans and What It Really Solves

Debt consolidation is one new borrowing taken to repay several existing ones. Several payments on several dates become one payment on one schedule. The monthly amount changes and the end date changes. What is owed does not fall by a single rupee, and the total paid usually rises. Consolidation solves a cash flow problem, and only if the debts it repaid stay repaid.

Consolidation is the only step in this subject that can make a position feel dramatically better while making one measurable thing worse. Consolidation is an exchange, and the two sides are clean: it fixes the month and it lengthens the debt. Two routes run on one household's three debts, worked to the rupee, and a single fact about the money coming in decides which of the two is real.

What is debt consolidation, mechanically?

Start away from borrowing. A tailoring counter buys cloth from three suppliers. One wants paying on the fifth, one on the fifteenth, one whenever he next passes. Three chances to be caught short on the wrong morning. Now a fourth person pays all three today and the counter pays that person once a month. Three unpredictable demands became one predictable one, and nothing was forgiven.

A borrowing does exactly what the fourth person did. ConsolidationOne new borrowing taken out to repay several existing ones, leaving one obligation to one lender. is one new borrowing whose purpose is to repay other borrowings. The money never reaches the household as spending money. Consolidation changes the shape of a debt and not its size, and every honest thing said about it follows from that sentence.

The Bhosale household reached 31 March of its second year owing three things. A card balance of Rs 48,594/-, run up on groceries and fuel. Rs 8,000/- left on a pay-later plan for a school tablet. And Rs 15,000/- from Ashok Bhosale's brother, with no interest and no schedule.

What actually changes when three debts become one?

Four things change. The number of payments: three become one. A household close to the line manages a calendar rather than an average. The dates: three become one, and a single scheduleOne payment on one date each month in place of several payments on several dates. is worth something on its own. The rate: three arrangements become one rate on the whole amount. And the monthly amount, the one everybody notices.

Now the other list, and it is the more important one. The amount owed does not change. Nor does the income, the outgoings, or the gap between them that is the reason the debt exists. Consolidation acts on the right hand side of a household's arithmetic and not once on the left. A month can feel transformed while whatever produced the month stays exactly where it was.

What does consolidation actually solve?

Consolidation solves the month, and that is not small. A household that cannot make this month's payments does not get to have opinions about totals. On 31 March the card asked a minimum of Rs 2,558/- and the pay-later plan Rs 4,000/-. Rs 6,558/- left each month against a take-home of Rs 44,200/-, and 14.8 per cent went out before food.

The two-wheeler loan had already ended in January, on schedule, so this is the position after one debt finished. Consolidated over thirty six months at an invented quoted rate of 18 per cent a year, the instalment is Rs 2,588/-. The Rs 6,558/- becomes Rs 2,588/-, a fall of Rs 3,970/- a month, and the share of take-home falls to 5.9 per cent. The fall answers a cash flow problemNot having enough this month for what is due this month, which is a different problem from owing too much in total..

Set that against what is actually wrong. The household is short by Rs 20,640/- across the year, or Rs 1,720/- a month. The monthly relief of Rs 3,970/- is more than twice the monthly shortfall. Consolidation can turn an impossible month into a possible one without having repaired anything. Cash flow and total owed are different problems, and judging this step by the total is like judging an umbrella by whether it stopped the rain.

What does it leave completely untouched?

The amount. Rs 71,594/- consolidated is Rs 71,594/- afterwards. Bluntness helps here, since the relief of one payment instead of three genuinely feels like the pile shrank. One lender paid three others.

A second thing is flattened rather than left alone. The Rs 15,000/- from Ashok Bhosale's brother carried no interest at all. Afterwards it sits inside a borrowing charging 18 per cent a year like everything else, and its share of the charge is Rs 4,522/-.

Two thirds of the charge falls on the card balance, where the step earns its keep. The remaining Rs 6,934/- falls on Rs 23,000/- that was costing nothing. Consolidation prices every debt inside it at the same rate, so cheap debt swept in beside expensive debt starts paying for the privilege of being tidy.

Does it cost more or less in total?

More here, and the size is the useful part. Route one is consolidation: Rs 71,594/- over thirty six months at that 18 per cent a year, thirty six instalments of Rs 2,588/- with the last carrying the rounding, Rs 93,179/- repaid in all, and Rs 21,585/- of charge inside it.

Route two is paying Rs 6,500/- a month against the debts as they stand, highest rate first, clearing everything in thirteen months for a total repaidEverything paid across the life of a borrowing, being the amount borrowed plus every rupee of charge on it. of Rs 83,114/-, with Rs 11,520/- of charge inside it. Consolidation costs Rs 10,065/- more and takes twenty three months longer.

Now the part that looks wrong at first glance. The card charged 3.5 per cent a month; the new borrowing charges 1.5 per cent a month. The rate on the largest debt more than halved and the total still rose. A charge is a rate multiplied by a balance multiplied by time, and consolidation cuts the first while tripling the third. A lower rate running for longer routinely costs more than a higher rate running briefly.

Three settings carry the argument. At twelve months the instalment is Rs 6,564/-, above the Rs 6,558/- the household already cannot find. At thirteen months it drops to Rs 6,103/-, the first setting where the consolidated month is smaller than the month the household has now. At sixty months it is Rs 1,818/- a month and Rs 37,487/- of charge. Every month removed from the instalment is bought with rupees added to the total.

Why is the longer period doing all of the work?

Because it is the only lever consolidation pulls. Consolidate the same Rs 71,594/- at the same rate over thirteen months instead of thirty six and the instalment is Rs 6,103/-, barely below what the household pays now. The rate moved the month by Rs 455/-. The tenure extensionLengthening the period a borrowing runs for. The monthly amount falls and the total rises. produced the other Rs 3,515/-.

The extra twenty three months are not a side effect of the smaller instalment. Those months are what was purchased, and Rs 10,065/- is the price on the label.

What is the one condition without which it makes things worse?

The repaid lines have to stay repaid, and whether consolidation helps or harms turns on that rather than on any feature of the borrowing. When the lender pays the card issuer, the balance goes to nil and the card does not close. Before the step the household carried Rs 48,594/- against a Rs 60,000/- limit with Rs 11,406/- of room; after it, Rs 60,000/- of room. A cleared lineA credit line repaid to nil but still open, so its full limit is available again. is an empty capacity rather than a closed one, so consolidation ends with the household able to owe more than it could the day before.

Think of a jug. The debt was water and consolidation poured it into another jug. The first jug stands there empty, with the capacity it always had, and the tap is running at the same rate.

What does consolidating do to a credit record?

Two things at once, in opposite directions. Any claim that consolidation is simply good or bad for a record has skipped a step. On one side, three balances report as repaid and card use falls from 81.0 per cent of the limit to nil.

On the other, a new commitment appears carrying no payment history at all, an application was recorded when it was made, and the average age of what the household holds gets younger. The record shows a household that repaid three things and took on one, and which of those weighs more is decided by whoever reads it.

One detail is easy to miss. The pay-later instalment paid 40 days late sits on the record as a missed payment. Consolidating the remaining Rs 8,000/- repays the balance. The entry stays. Repaying settles the amount and leaves the history where it was.

When does the arithmetic favour it, and when does it not?

The next two comparisons hold as a pair rather than one being chosen over the other. Against what the household pays right now, Rs 6,558/- a month, consolidation at Rs 2,588/- is a fall of Rs 3,970/- on a household short by Rs 1,720/- a month. On that comparison it is the difference between a month that works and one that does not.

Against paying Rs 6,500/- a month and clearing everything in thirteen months for Rs 83,114/-, consolidation costs Rs 10,065/- more and runs twenty three months longer. On that comparison it is the more expensive route.

Both are true and point opposite ways, so something outside the arithmetic decides which is live. The deciding fact is whether Rs 6,500/- a month actually exists in the household, and in this one, short by Rs 1,720/- a month with no increment and a counter that took Rs 52,800/- against Rs 96,000/-, it does not.

Where the money for the shorter route exists, that route costs less and the arithmetic says so plainly. Where it does not, it is not a route at all. Which of the two describes a given household is a fact about that household rather than about the arithmetic.

What can consolidation not fix at all?

A gap between what comes in and what goes out. Money in fell to Rs 5,30,400/- because the market lane was dug up for drainage work and stayed dug up for five months. Money out stayed at Rs 5,51,040/-. The year ran Rs 20,640/- short, and no decision produced that number.

Consolidation puts nothing into the Rs 5,30,400/- and takes nothing out of the Rs 5,51,040/-. The two bars that made the debt are the same height after the step as before it. A consolidated household can find itself back on the card without anything having gone wrong that was not already wrong. Only two things close that gap and neither is a borrowing.

How does a lender read a request to consolidate?

A lender assessing a request to consolidate is answering one question: can this household pay this instalment for this many months. The lender looks at what comes in and how reliably, what is already committed, what the record says, and the amount against income. Rs 71,594/- against a take-home of Rs 44,200/- is about one and a half months of it.

Two things here read in opposite directions. In its favour, thirty of thirty two-wheeler instalments were paid on time, that loan closed on schedule, and every card minimum was paid in full on the due date. Against it, card use ran at 81.0 per cent of the limit and one instalment was 40 days late. The lender is reading conduct and capacityHow much a household is able to owe, counting open unused limits as well as balances carried. rather than the reason anything happened. A household hit by something outside itself is read on the marks the event left.

The same logic explains a secured consolidationA consolidation backed by something the lender can take if payments stop, such as property or gold., offered to some households when an unsecured one is not available. Putting something behind the borrowing changes the lender's exposure and so changes what they will offer. Security also changes what is at stake: a claim on income becomes a claim on a thing. The second half of that exchange is easy to miss.

The Bhosale household, Meghna Bhosale, Ashok Bhosale, Ira Bhosale and Sahyadri Freight Services Private Limited are invented.
Educational material. Not advice on any investment, tax, budget or market position.