How Does A Debt Consolidation Loan Work?
Did you know that a debt consolation loan can simplify the process of dealing with your overdue payments?
Yes, if you know how debt consolidation works, it can do so even if you have been making several unpredictable payments after every few days for a long time. So how does debt consolidation loan work?
This article answers that and defines debt consolidation loans for those who need the basics.
Moreover, it covers how these loans can help you to get rid of debts and related financial burdens. It also tells you how a debt consolidation loan could help you start your journey to financial freedom right away.
What Is A Debt Consolidation Loan?
A debt consolidation loan is a unique type of personal loan with a single monthly payment that you use to pay off your multiple debts at once.
For the best result, you should choose affordable debt consolidation loans. The rates and packages vary depending on your:
- Loan amount
- Loan tenure
- Citizenship status
- Outstanding debt
Licensed money lenders offer debt consolidation loans. These are not to be confused with a debt consolidation plan (DCP) offered by banks. But they have the same goal – to make handling your debt less of a hassle, at a better rate.
Licensed money lenders have more relaxed requirements, faster processing, and flexible terms.
So how does debt consolidation loan work? Let’s use an example to illustrate how a debt consolidation loan works.
Assume you take a fixed-rate installment loan. In this case, you make a single predictable payment every month.
In other words, if you have taken loans from three credit cards with varying interest rates, you could use the loan to pay off all the debts.
Here’s how your debt consolidation loan can help you to reduce the cost of your three loans.
|Credit Card||Balance||Annual Percentage Rate (APR)|
- If you pay the three balances over the course of one year, your interest would be $927.
- You can save a lot of money if you take out a 12-month personal loan with a 10% APR.
Let’s say you take out a $8,000 debt consolidation loan and pay it off in one year. In this case, you could reduce the interest cost to $440.
So consolidating debt doesn’t have to be a costly affair, but you should understand how it works before trying to consolidate your loans.
How Does A Debt Consolidation Plan Work?
On the other hand, the Association of Banks in Singapore (ABS) announced a DCP in 2017. Only offered by banks, a DCP can:
- Lower your monthly payments
- Reduce your loan’s interest rates and other charges
- Help you to improve your credit score
- Simplify your bill paying process
A DCP was designed for unsecured loans such as:
- Personal loans
- Credit lines
- Credit cards
Banks have somewhat stricter requirements for a DCP:
- You must earn between $30,000 and $120,000 annually to qualify
- You may need additional documents such as your latest Credit Bureau Report and a settlement letter from the original bank you borrowed from
Some unsecured credit facilities that a debt consolidation plan can’t finance are:
- Business loans
- Medical loans
- Education loans
- Joint accounts
- Renovation credit facilities
How To Use A Debt Consolidation Calculator
A debt consolidation calculator can help you to find a debt consolidation loan in Singapore that’s right for you.
In most cases, these calculators compare the monthly payments and interest on multiple debts with the rates and payments of the debt consolidation loan.
If the interest rate and payment on the consolidation loan are more affordable than what you’re paying on multiple debts, then the plan could be the right one for you.
Here are the details that you should have if you want to use your debt consolidation calculator with ease:
- The total balance (debt)
- The exact amount of your monthly payments
- Each of your current debt’s annual percentage rate (APR)
- The terms of each of the debts
To get an accurate quote, ensure you enter the variables as accurately as possible. Feel free to adjust the loan amount and tenure to arrive at a monthly payment that you can pay comfortably.
You can also use your debt consolidation calculator to compare the terms of the loans and find the one that best suits you. You can consider getting a consolidated loan with a longer term if you want a lower monthly payment.
On the other hand, you can go for one with a higher monthly installment and lower interest if you want to get out of debt faster.
How Much Can You Borrow?
Debt consolidation loan money lenders often lend qualified applicants a debt consolidation loan amount that is equal to the amount written in their statement of accounts.
So you can borrow an amount equivalent to:
- The amount you owe
- Other fees or charges that have accrued.
Sometimes, your bank might offer you a DCP that isn’t enough to settle your consolidated debt. If you find yourself in this situation, pay the outstanding balance directly to each institution you still owe.
For your first DCP, you’ll get an additional 5% allowance. This serves as a cushion for the lender as it covers any charges incurred during the period it took to process your debt consolidation application. It is paid directly to the lender.
Debt consolidation plans are special financial tools the Singapore government has designed to help specific people. But their criteria are just as specific.
To qualify, you must be:
- A Singapore citizen or permanent resident (PR)
- A salaried employee who earns between $20,000 and $120,000 per year
- An adult whose net personal assets are worth less than $2 million
- An applicant whose outstanding debt is at least 12 times of monthly income
Where To Apply For A Debt Consolidation Loan
Now that we’ve answered your question, “how does debt consolidation loan work?” in detail, you can move ahead to secure affordable loans for consolidating your debts.
Apply for a debt consolidating loan from one of the 14 participating financial institutions in Singapore. Please note that each of them has unique terms, conditions, and rates.
So, you should shop around before applying.
At the same time, prepare the following documents and have them ready before starting the process:
- Photocopy of your NRIC (front and back)
- Confirmation letter showing unbilled balances for your installment plans and unsecured credit card
- Latest Credit Bureau report
- Latest credit card plus unsecured loan statements
- Latest income documents
Here are the 14 participating financial institutions where you should apply for a DCP once you are ready:
- American Express International, Inc.
- Bank of China Limited Singapore
- CIMB Bank Berhad
- Citibank Singapore Limited
- DBS/POSB Bank Ltd
- Diners Club Singapore Pte Ltd
- HL Bank
- HSBC Bank (Singapore) Limited
- Industrial and Commercial Bank of China Limited
- Standard Chartered Bank (Singapore) Limited
- Maybank Singapore Limited
- Oversea-Chinese Banking Corporation Limited
- RHB Bank Berhad
- United Overseas Bank Limited
If you don’t qualify for a DCP, apply for a debt consolidation plan from a money lender.
Singaporeans, PRs, and foreigners have an alternative way of dealing with costly unsecured debts. They can apply for regular personal loans with the goal of debt consolidation.
If you don’t qualify for the DCP, you can follow the steps to consolidate and pay your debts:
Step 1: Compare loan interest rates.
Step 2: Choose the most affordable loan with favourable terms and conditions.
Step 3: Apply for the money and wait for the approval.
Step 4: Once you’ve received the money, use it to pay off all the debts.
Step 5: Start paying for this one personal loan every month until you complete it.
Make It Easy To Manage Your Debts
If you have several unsecured debts and are struggling to deal with all of them, debt consolidation could be all you need to regain control over your finances.
An efficient debt management plan streamlines your payments and lowers your interest rate and monthly payment.
We’ve answered the question, “How does a debt consolidation loan work?” above in detail for a good reason. Once you get a sense of how it releases you from stress, you can start consolidating your debts. You can use a debt consolidation calculator for this purpose.
When you look around for the best offers, you’ll see how different loans, loan terms, and loan amounts compare to one other and how much you can save over time.
Use this method if you’re looking for a debt management plan in Singapore that suits your situation and want to secure your financial freedom fast.
Horison Credit is a good place to start your search. We are a licensed money lender in Singapore that offers personal loans tailored to our clients’ needs.