Debt Consolidation vs Loan Restructuring: Which one works best for you? Find out

Choosing between the two depends entirely on your situation. If you’re managing your EMIs but dealing with multiple high-interest debts, consolidation may offer convenience and cost savings.

New Delhi:

Mounting debt is a reality for many Indian households. With rising living costs, job uncertainty, and easy access to credit, millions find themselves juggling multiple EMIs or struggling with overdue loans. According to TransUnion CIBIL, non-performing assets on credit cards surged by 28 per cent in 2024 alone, touching Rs 6,742 crore. In such situations, two financial strategies often come into play – debt consolidation and loan restructuring. 

According to Kundan Shahi, Founder, Zavo, while both aim to ease the burden of repayment, they serve different needs and are suited for different scenarios. 

Let’s take a closer look at what each means and how to determine which one might work best for you.

What is Debt Consolidation?

Debt consolidation is the process of combining multiple debts, such as credit cards, personal loans, and payday loans, into a single loan. Instead of tracking different EMIs and interest rates, you take one loan to repay them all and focus on a single, simplified payment. 

“This new loan ideally comes with a lower interest rate or longer tenure, reducing your monthly outflow. For instance, credit card debt in India can carry interest rates ranging from 30 per cent to 48 per cent per annum, while a personal loan might have an interest rates ranging from 11 per cent to 22 per cent. Replacing high-cost debt with a lower-interest personal loan or a top-up on your home loan can lead to significant savings,” Shahi said. 

According to the expert, debt consolidation is most effective when you have a steady income and a decent credit score. It not only streamlines your finances but also helps improve your credit score if you stay disciplined with repayments. However, this method requires eligibility. Lenders assess your credit profile before approving the new loan. 

“Without good financial habits, there’s a risk of falling back into the debt trap, especially if spending doesn’t decrease,” he added.

What is Loan Restructuring?

Loan restructuring is a relief mechanism offered by your current lender when you’re unable to repay a loan on its original terms. It may involve extending the loan tenure, reducing the interest rate, pausing payments temporarily, or even waiving a portion of the outstanding amount. This method gained widespread recognition during the COVID-19 pandemic, when over 50 lakh Indian borrowers were granted moratoriums or restructuring options.

Unlike consolidation, restructuring is generally a last resort. It’s designed for borrowers facing genuine hardship, such as job loss or income disruptions, who are at risk of default. 

“The lender assesses your situation and may adjust the loan terms to avoid total loss. While this provides short-term relief, it may come with long-term consequences. Most restructured loans are flagged in credit reports, which can lower your score and affect your future loan eligibility,” the founder of Zavo said.

Which One Should You Choose?

Choosing between the two depends entirely on your situation. If you’re managing your EMIs but dealing with multiple high-interest debts, consolidation may offer convenience and cost savings. If you’re already missing payments or nearing default, restructuring might help stabilize your finances.

“There is a fine line in deciding the right approach to debt. If you have multiple high-interest loans but stable income, consolidating them into one lower-rate loan can simplify repayment and save money. However, if you’re already unable to pay and default looms, restructuring with your lender might be the lifeline you need to stay afloat,” Shahi concluded.