Debt consolidation means replacing several costly loans with one cheaper loan, so that you make one payment every month, at a lower rate of interest. Some debt management apps go further. They read your bank account and pay down your most expensive debts automatically.
Why is this needed? Credit card dues are the most expensive common debt. If you do not pay the full bill, Indian banks typically charge interest of 3% to 3.75% a month on the unpaid amount, which is 36% to 45% a year. A personal loan for a borrower with a good record usually costs much less.
Say a sales executive in Ludhiana owes ₹80,000 on one credit card and ₹40,000 on another. Both cards charge about 42% a year. He pays about ₹4,200 a month in interest alone. He takes one personal loan of ₹1,20,000 at 16% a year, for two years. The lender pays the ₹1,20,000 directly to the two card issuers, and both card dues are closed. He now pays one EMI of about ₹5,900 a month. In the first month, only about ₹1,600 of it is interest. The rest repays the loan.
Here is how the service decides. With the borrower's consent, it fetches his report from a credit bureau. The report lists every loan and card he has, with the amount owed. It reads his income and spending through bank statement analysis. In India, the bank statements are often shared through an account aggregator, a licensed service that passes financial data between companies with the person's consent. The lender then checks his credit score and decides whether to give the loan. The loan itself often comes from an instant personal loan app or its lending partner.
Abroad, some apps also pay down card debt automatically. The app moves small amounts from the person's bank account to the cards on the best days, and pays the card with the highest interest first.
Consolidation has one big risk. It only helps if the person does not run up new debt on the old cards. Otherwise, they end up with the new loan and new card dues as well.