Let us suppose you have Rs 60,000 outstanding on credit cards and another Rs 80,000 in a personal loan.
Now personal loans are costly but not as much as credit cards. Credit card debt can cost more than 40% every year! Yes, that is true. Personal loan on other hand is cheaper and you can even get it for 15% if your lender is willing.
So doesn’t it make sense to take one loan of Rs 1.4 lacs at 15% to clear of Rs 60,000 worth of credit card debt (at 40%) and Rs 80,000 worth of other loan (say at 15%). It indeed makes mathematical sense. The overall effective rate of interest in case of single loan will be lower than the average rates of all the other loans. Also, you just have to deal with one monthly EMI instead of several ones.
Many people make the mistake of thinking that once they have cleared off all other loans, they are free to borrow more. But in reality, the total outstanding is still the same. It is only consolidated into one loan now.
The lenders might not be willing to lend you the full-required amount to clear off all other loans. In such a case, take a smaller loan and first of all clear off the loan that has the highest rate of interest.
So as it is clear from above, taking a loan (at lower rate) to clear off all other loans is not a bad idea. But this should be handled with care. Ideally, you shouldn’t have taken so much loans in first place that you eventually need another low-cost loan to clear off older loans. So be careful when you are borrowing. Never borrow more than what you can comfortably repay.