How to Calculate the Total Cost of a Debt Consolidation Loan?

Having several debts means dealing with different EMIs, interest rates and due dates. It can also be hard to know how much you are paying in interest and fees. Before taking a new loan to clear these debts, check the full amount you will pay. This helps you see if the new loan will really cost less.

Key Takeaways

• You must calculate the true borrowing cost by adding the total interest, processing fees, and applicable taxes.
• Do not pick a loan just for a lower EMI, because longer terms mean higher total interest.
• You should carefully compare the full repayment amount of your current debts against the new loan offer.

What Makes Up the Total Cost of a Consolidation Loan?

The principal and borrowing cost are different. The principal is the total sanctioned loan amount you agree to repay, not a borrowing cost. Keep in mind that the amount you actually receive (the net disbursed amount) may be lower if the lender deducts upfront fees or charges before transferring the funds.

Total Borrowing Cost = Total Interest + Total Fees (only those not already paid as part of EMI) + Applicable Taxes

Total Repayment Amount = Principal + Total Interest + Total Fees (only those not already paid as part of EMI) + Applicable Taxes

For example, if you borrow ₹3,00,000 and pay ₹60,000 as interest and ₹6,000 in fees and taxes, your borrowing cost is ₹66,000. Your total repayment is ₹3,66,000.

Check these costs:

Cost	What it means
Principal	The amount you borrow
Interest	Money charged on the loan
Processing fee	Fee for processing the loan, if applicable
Applicable taxes	Taxes charged on fees or services, where applicable
Third-party charges	Certain charges collected for third-party services, where applicable
Prepayment charge	Charge for paying early, where such a charge is allowed

RBI requires applicable loan charges to be shown in KFS.  The KFS also shows the Annual Percentage Rate (APR), which gives a wider view of the loan cost.

List Your Current Debts and Interest Rates

First, find the exact amount you owe on each debt you want to combine. For each debt, note:

• Current outstanding balance
• Current interest rate
• Remaining loan period
• Current EMI or monthly payment
• Amount needed to close the debt
• Any applicable closure or prepayment charge

Use the current outstanding amount and actual closure amount. Do not add all remaining EMIs because they may include future interest that you would avoid after closing the debt.

For credit cards, use the full amount needed to clear the balance. The minimum amount due is only that month's payment and is not the amount needed to clear the whole debt.

Understand Interest Rates Versus APR

The interest rate tells you how interest is charged. APR gives a wider view because it expresses the overall cost of credit, interest plus other charges linked to the facility, as a single annualised rate.

RBI defines APR as the yearly cost of credit, including the interest rate and other loan charges. The KFS also shows the APR and repayment schedule.

When comparing loans, check the interest rate, APR and total amount payable. A loan with a similar interest rate can still cost more because of higher fees or a longer repayment period.

Add Up All Upfront Fees and Extra Charges

Read the KFS, sanction letter and loan agreement before accepting the loan. Check:

• Processing fees
• Applicable taxes on fees
• Third-party charges, where applicable
• Charges for optional services you choose
• Prepayment charges, where legally allowed
• Penal charges for certain breaches of the loan terms

RBI requires applicable fees and charges to be disclosed in the KFS. A fee or charge not listed in the KFS generally cannot be charged later during the loan term by the regulated entity without the borrower's explicit consent.

Check the exact amount of each charge and when it must be paid.

How Loan Length Changes Your Final Cost

The number of months you take to repay the loan affects total interest. A longer tenure usually gives a lower EMI because repayment is spread over more months. But you may pay more interest during that period.

For example, suppose you borrow ₹3,00,000 at 14% annual interest for 36 months. Using the monthly reducing-balance EMI formula:

EMI = P × r × (1+r)ⁿ ÷ [(1+r)ⁿ - 1]

Here:

• P = ₹3,00,000
• r = 14% ÷ 12 = 0.0116667 per month
• n = 36 months

The EMI is about ₹10,253. Total EMI payments are about ₹3,69,118. So, interest is about ₹69,118 before fees and applicable taxes.

Use the lender's repayment schedule for your actual figures.

Step-by-Step Way to Calculate Your Total Payment

Follow these steps:

Step 1: Add the current outstanding amounts of all debts you want to close.

Step 2: Add the amounts needed to close the old debts, including applicable closure charges.

Step 3: Check the new loan amount, interest rate, tenure, EMI and all KFS charges.

Step 4: Multiply the EMI by the total number of EMIs.

Step 5: Add the fees, applicable taxes and other charges you will pay.

Step 6: Keep the principal separate from the extra amount paid for the loan.

Use these formulas:

Total EMI Payments = EMI × Number of EMIs

Total Borrowing Cost = Total EMI Payments - Principal + Total Fees + Applicable Taxes not already included in the EMI

Total Repayment Amount = Principal + Total Borrowing Cost

Do not calculate interest by multiplying the annual rate by the original loan amount. In a reducing-balance loan, interest is based on the amount still owed, so it changes as the principal goes down.

Compare Your Old Debt Cost to the New Loan

Compare the cost of keeping the old debts with the cost of the new loan.

For the old debts, use the current repayment schedules to find the remaining interest. Also include the amount needed to close them if you plan to close them early.

For the new loan, add all EMI payments, fees and applicable taxes.

Cost of keeping old debts vs. Borrowing cost of the new loan

Do not choose the new loan only because its EMI is lower. A lower EMI can come from a longer tenure and may mean more total interest. Also check how long it will take to become debt-free under each option.

Watch Out for Hidden Costs and Early Payoff Fees

Read the KFS and loan agreement for prepayment, foreclosure, late payment and other charges.

RBI's Pre-payment Charges on Loans Directions, 2025 apply to loans sanctioned or renewed from January 1, 2026. For floating-rate loans given to individual borrowers for non-business purposes, regulated entities cannot charge prepayment fees. This applies to both part-prepayment and full prepayment, regardless of where the money comes from.

This rule applies to floating-rate loans. For other loans, including applicable fixed-rate loans, check the prepayment terms and charges in your loan documents.

How to Get a Debt Consolidation Loan?

The more options you have, the better rate you'll find. LoanLogic brings together 50+ RBI-approved lenders, so you're not stuck with whatever your local bank offers. Check consolidation loans up to ₹50,00,000 online, compare the terms side by side, and pick what actually works for your EMIs.

Conclusion

Before taking a debt consolidation loan, check the interest, fees, taxes and loan period. Then compare the full borrowing cost with your current debts. A lower EMI does not always mean a cheaper loan, so check the total amount you will pay.

FAQs

How do you calculate debt consolidation?

Add the debts you want to combine, then compare the new loan's total interest, fees, taxes and repayment amount with your current debts.

What is the formula for calculating debt?

There is no single formula for all debt. For a loan, total debt cost can be calculated as principal plus interest and applicable charges.

How does debt consolidation work?

You take one new loan to pay off multiple debts. You then repay the new loan through one regular EMI.

Can I get a debt consolidation loan with bad credit?

It is feasible, but approval depends on the lender's underwriting criteria, income, obligations and credit history, some may decline or ask for a higher rate.

Is it cheaper to consolidate debts?

It can be cheaper if the new loan contract provides significant cost savings. However, it can also become more expensive if the extended payment period reduces the amount of money you can afford repayments, or additional costs are incurred.

What makes you ineligible for debt consolidation?

You can be rejected by a lender if they consider your credit history too negative, you have insufficient income, too high debt, unstable employment, or you simply do not meet their requirements.

Is debt consolidation a good idea?

Debt consolidation can be a good choice if the terms of the new contract are significantly more favorable. It is essential to perform simple calculations to ensure that the new contract does not incur additional costs and that you can afford the payments.

Does debt consolidation hurt your credit score?

It can dip slightly at first due to a new credit check and account, but timely EMI payments can help rebuild your score over time.

Can I consolidate secured and unsecured debts together?

Lenders mostly consolidate unsecured debts like credit card payments, personal loan payments etc., based on certain eligibility criteria according to their policies.

How long will it take to complete this process?

The duration may differ depending on lenders, but it generally takes between a few days to two weeks to get approved and disbursed after verification of documents.