Let’s be honest – staying on top of your credit card bills, student loans, and other monthly loan payments can be challenging.
So if you feel overwhelmed by managing multiple debts every month, debt consolidation could be the solution to get you out of your misery.
It will combine multiple loan payments into one, lower your interest rate, and help you pay off your debt faster. But what is debt consolidation loan?
This blog post will help you understand debt consolidation loans, their application process, and some associated pros and cons. Keep reading to learn more.
Simply put, a debt consolidation loan is a personal loan that helps you repay multiple loans or debts by rolling them all into a single monthly payment.
For instance, if you have four different credit card debts with varying interest rates, a debt consolidation loan can turn those into one manageable monthly payment. Or, you may even combine personal and credit card loans into one.
This consolidated loan will have a fixed interest rate lower than the average of your current debts.
In addition, the monthly payment on a debt consolidation loan will be lower than the sum of your current monthly payments.
The goal of a debt consolidation loan is to save you money by simplifying your monthly payments and reducing your overall interest rate.
Here’s how a debt consolidation loan can benefit you:
You’ll only need to make one monthly payment to your lender, which is much easier to keep track of than multiple payments. This will help you streamline your monthly finances and have fewer payments to worry about.
Lower Interest Rate
You are likely to get a lower interest rate on your consolidation loan than what you’re already paying on your current debts. This will take some stress off your mind and help you save money in the long run.
But make sure you shop for the best interest rates and loan terms before applying for a debt consolidation loan.
Pay Off Debt Faster
You’ll essentially be saving money when you get a debt consolidation loan with a lower interest rate. You could use this saved amount to make bigger repayments and reduce the overall principal amount to pay off your debt faster.
Improve Credit Score
When you’re focused on just one monthly payment, you are likely to stay away from defaulting on your consolidation loan. The timely monthly payments you make will improve your credit score.
While a debt consolidation loan comes with several benefits, there are also some potential drawbacks to be aware of, such as:
You May End Up Paying More Interest
Even if you get a lower interest rate on your consolidation loan, you may still pay more interest if you extend the loan repayment period. So ensure you understand how much interest you’ll be paying overall before signing a loan agreement.
You May Be Tempted To Rack Up More Debt
If you consolidate your debts into one personal loan, you may be tempted to use your newly available credit to rack up more debt. This would defeat the purpose of consolidation and leave you in an even worse financial position.
Now that you know what a debt consolidation loan is and its pros and cons, let’s discuss how it works.
To begin, you’ll need to calculate your total debt to see how much you need to borrow.
Once you know the total amount, you can shop around for a personal loan with a lower interest rate than what you’re currently paying.
Then, you need to formally submit a loan application with an amount equal to what you collectively owe to all your lenders and creditors, plus the interest.
If your loan gets approved, you’ll sign a loan agreement with the lender and use the loan amount to repay your previous debts.
But thankfully, you won’t need to make multiple payments now. Your new lender will handle those payments, and you will only make one monthly payment.
You can get a debt consolidation loan from banks, licensed money lenders, or credit unions.
The application process and required documents may vary, but you can typically expect to need the following:
For Singapore citizens and permanent residents:
For foreigners residing in Singapore:
But no matter your citizenship status, compare the interest rates, fees, and loan terms from different lenders to find the best deal for your needs when applying for a debt consolidation loan.
Another critical aspect to remember is the difference between a debt consolidation loan and Debt Consolidation Plan (DCP).
A debt consolidation loan is a personal loan you apply at any licensed money lender to combine multiple debts (or loans) into a single loan.
A DCP, on the other hand, is a debt refinancing programme offered by banks.
Credit Counselling Singapore (CCS) is a non-profit credit counselling agency that helps debt-distressed individuals.
Let’s say you are struggling with monthly loan repayments or credit card bills. In that case, CCS might be able to assist you in renegotiating repayment terms, getting consolidation loans, or providing financial advice.
One of the finance solutions they offer troubled borrowers is the Debt Consolidation Plan (DCP).
It is similar to a debt consolidation loan that combines multiple loan repayments into a single unsecured loan. However, it is known as a “plan” and is offered only by banks, not money lenders.
And like other personal loans, banks have somewhat stricter requirements for a DCP.
For example, you must earn between $30,000 and $120,000 annually to qualify for this plan. Similarly, they may ask for additional documents such as your latest Credit Bureau Report and a settlement letter from the original lenders (banks).
This can make getting a debt consolidation loan from banks a little more complicated.
On the other hand, licensed money lenders offer debt consolidation loans with less-stringent requirements, faster processing, and flexible terms.
The exclusion of some unsecured loans from a DCP is another important thing to note.
Remember that a DCP can’t include the following loans:
A debt consolidation loan could be a good option if you’re struggling to make multiple debt repayments monthly.
But make sure you have understood how consolidation loans work and the potential risks involved before taking one out. You don’t want to end up in a worse financial situation than you’re already in.
Some possible situations where consolidation could be a good option include:
If you have multiple debts with various lenders, it can be challenging to keep track of them all. A debt consolidation loan would allow you to pay off all your debts with just one lender.
Small debts can be paid off in a year or less. Getting a debt consolidation loan might not be ideal for small loan amounts.
However, if you have a large debt to repay, a consolidation loan could help make your monthly repayments more manageable and your life easier.
If you’re paying high interest rates on your debts, consolidation could help you get a lower rate. This would free up some of your monthly cashflow, which you could use to make extra repayments and pay off your debt faster.
If you’re using credit cards to pay your monthly bills, you could be racking up a lot of debt. A debt consolidation loan could help you by giving you a fixed interest rate and monthly payment amount.
So now you know what is debt consolidation loan. If you’re not sure whether consolidation is right for you or if you can get it approved or not, you may want to consider speaking to a financial counsellor.
Loan officers at Katong Credit can help you understand your options and make a plan to get out of debt. Contact us now or apply for a loan today.