What Is A Debt Consolidation Loan?
Paying off different types of loans could drain you mentally and take a toll on your finances.
Keeping track of the interest rate of each type of loan, remembering the due date of each installment every month, and making sure to pay them on time is exhausting.
If you are drowning in different kinds of debt – be it personal loans, college debt, home renovation loans or medical emergencies – and the end is nowhere in sight, then a debt consolidation loan may be just what you need.
In this article, we will explain what is debt consolidation loan, how it works in Singapore, and how it may help you.
What Is Debt Consolidation Loan?
A debt consolidation loan is acquired to pay off all your other existing debts. It combines all your different types of loans into a single one.
So instead of you paying different installments with different interest rates, you now only have to make a single payment each month that would take care of all your loans.
It may seem counterintuitive to incur a new debt to pay off previous debts.
But when done within the right circumstances, it can be a highly effective loan payment strategy that has helped many pay off their loans.
You can get a debt consolidation loan from licensed money lenders. But various financial institutions, including banks, offer debt consolidation plans (DCPs).
A DCP is a debt refinancing programme that enables you to consolidate all your unsecured debt from different financial institutions. It has more stringent criteria than a debt consolidation loan.
The hassle of paying back different loans on different dates and at various rates from various financial institutions is also reduced when you opt for a debt consolidation loan.
But more importantly, you should be able to pay less every month through a debt consolidation loan’s lower interest rate.
When You Should Apply For A Debt Consolidation Loan
Debt consolidation may not be your first option when dealing with large debt amounts, and different kinds of loans.
But as mentioned, under the right circumstances, it can prove to be just the right strategy.
Now that you know what is debt consolidation loan, here are a few ways to decide if getting a debt consolidation loan is the right thing for you.
Debt consolidation may be a good option if you:
- Have a large amount, and different types of loans that you have trouble keeping track of
- Wish to improve your finances. Debt consolidation is not for those who are financially irresponsible. It requires strict budgeting and excellent follow-through to reach your end goal: being debt-free
- Have a credit score that is high enough to earn you a lower interest rate than that you are already paying. Debt consolidation is a viable option only if you are saving money through lower interest rates over the duration of your loan.
- Can comfortably afford the loan payment each month. Opt for a debt consolidation loan only if you think that you can easily cover the total cost of the new loan each month
What Are The Benefits Of A Debt Consolidation Loan?
A debt consolidation loan can have multiple benefits when used wisely and responsibly.
Here are some of the advantages of a debt consolidation loan:
It Streamlines Your Finances
Debt consolidation brings all your loans into a single outstanding payment that you have to pay each month.
It can also reduce the interest that you pay on each outstanding loan. Debt consolidation also reduces the chances of missing your loan installment each month.
If your end goal is to get debt-free soon with the least amount of hassle and stress, then debt consolidation could be your best bet.
Lower Interest Rate
Has your credit score has improved by taking various loans? If so, there is a good possibility that your good credit score may qualify you for a lower interest rate overall when you opt for debt consolidation.
This applies even if most of your loans are low-interest. With a lower interest rate, you can save more over the life of your consolidated loan.
To get the best interest rates, make sure that you research and shop around for a licensed money lender that offers you the lowest interest rate on your consolidated loan.
Can Accelerate Payoff
If after all considerations and calculations, your consolidated debt payment is lower than paying off all individual loans, it is highly recommended that you make extra loan repayments with the money you save every month.
This will not only help you in paying off your debts quicker, but will save you money in interest and any applicable fees.
But to enjoy this advantage, you must make sure to pay off your debt early on.
Reduction In Monthly Payment
After you have consolidated all your previous debts, your new debt will get you a new deadline and monthly installment amount, which should be lower than what you were paying previously.
Improved Credit Score
Getting new loans can cause your credit score to plummet, but a debt consolidation loan can improve your credit score in different ways.
If you pay off your credit card debt, for instance, then the reduced credit utilisation rate would be reflected in your credit score.
The ideal utilisation rate should be below 30%, and a debt consolidation loan can help you achieve it.
Making timely loan payments also helps to improve your credit score.
What Are The Drawbacks Of A Debt Consolidation Loan?
While debt consolidation may seem like the ultimate solution to your long-term debt problem, it may pose a risk to your already poor finances if you are not too careful.
Here are some of the disadvantages that a debt consolidation loan may have:
Like any other debt, a debt consolidation loan has its share of additional costs such as transfer fees, closing costs, origination fees and annual fees, in addition to the newly decided interest rate.
It is best that you negotiate for the best overall interest rate and fees before signing on a loan contract with a licensed money lender.
Paying More In Interest
You must only opt for debt consolidation if you qualify for a lower interest rate. If your credit score isn’t high enough to guarantee you a lower interest rate, then you may end up paying more during the life of your new consolidated debt. This will ultimately increase your costs.
If you end up missing any loan payments on a debt consolidation loan, then it puts your credit score at risk.
It may also incur additional fees such as late fees and late interest. Only sign up for a new loan if you are sure that you can easily reserve an amount from your monthly budget to pay it back on time.
You May End Up Paying More
Even if you are qualifying for lower interest rates on a debt consolidation loan, you may still end up paying more money over the life of the new loan.
This is because the timer on your new loan has restarted, and it may even take up to seven years to pay all your consolidated debt.
It Is Not The Ultimate Solution
Some borrowers may sign up for a debt consolidation loan as they believe it may fix all their financial troubles.
But while it is a strategy that enables you to pay off your existing debts more efficiently, it cannot solve the underlying issues that caused you to be saddled with debts in the first place.
Before opting for a debt consolidation loan, address and change your poor spending and budgeting habits to avoid running up even more debt.
Where To Get Debt Consolidation Loans
Licensed money lenders and banks offer debt consolidation loans.
Licensed Money Lenders
Debt consolidation money lenders offer debt consolidation loans to borrowers overwhelmed with managing multiple loans. To qualify, you must be:
- 21 to 65 years old
- A Singaporean or permanent resident
- Earning at least $20,000 annually
Once your loan has been granted, you’ll be required to suspend other credit facilities, pay them off, and now make monthly payments to the money lender.
Money lender repayment plans, including the loan tenure, are different from what banks offer. The loan tenure is usually within two to three years.
Consolidating debts with a bank is also another viable option when it comes to debt consolidation loans. This is called a DCP. Note that a DCP cannot be used for:
- Business credit lines
- Business loans
- Car loans
- Education loans
- Housing loans
- Joint accounts
- Medical loans
- Renovation loans
For banks, in addition to your loan account, you’re given a revolving door credit facility which is equivalent to one month’s salary for your daily needs. This comes at a fee, and it’s your choice to take it out or not.
Compared to money lenders, banks offer a longer repayment period, which can be up to 10 years.
Once you have obtained a debt consolidation plan from a bank, you can switch to another bank if needed. But you must wait at least three months from your last approval.
To qualify, you must:
- Be 21 to 65 years old
- Be a Singaporean or permanent resident
- Earn between $20,000 and $120,000 annually, with net personal assets worth at least $2 million
- Have outstanding unsecured balances that exceed more than 12 times of your monthly income
What Documents Do I Need To Apply For A Debt Consolidation Loan?
Singapore citizens and permanent residents are required to have:
- Proof of income (bank or CPF statements)
Foreigners must present their:
- Employment pass
- Proof of residency
- Bank statements or payslips
Alternatives To Debt Consolidation
If you don’t want to use debt consolidation to manage your multiple debts, you can consider these options.
Earn More Money
If your income is not enough to service all your debts, an additional income can be helpful. You can take on part-time physical or online jobs to rake in extra cash.
While this extra income source may help reduce the financial strain, you might still find it difficult to manage the different interest rates and due dates.
Sell What You Don’t Need
You can consider selling unwanted but valuable items to finance your loan. Some loan providers might permit you to lodge your valuables or property as collateral against your loan. Find out if your loan provider allows this, and how it works.
A Debt Consolidation Loan Can Help Manage Your Debts
These days, getting a debt consolidation loan is fairly easy once you know what is debt consolidation loan and how it can work in your favour.
Traditional banks check your credit score before approving any loan, but may grant you a loan if they are aware of your personal and financial situation, and if you have developed a connection with them.
It definitely helps to communicate well with your bank officer, as he or she can help you get easy terms and better rates for debt consolidation loans.
Licensed money lenders are another excellent source to get personal, unsecured loans from. This is a good option for borrowers with low credit scores, as licensed money lenders are more flexible in their eligibility criteria, and are open to negotiation with regard to interest rates and loan terms.
Do you have a poor credit score but want to get rid of all your debt as soon as possible?
Horison Credit can get your debt consolidation loan approved within 30 minutes of form submission. We are, after all, a trusted licensed money lender in Singapore.
Get in touch with us now or apply for a loan using your Singpass today. It just takes five minutes.