Do you have a lot of debt? If so, you may wonder if there is any way to get out from it. You may have heard of debt consolidation loans and wonder if they could help you.
This type of loan can simplify your finances and get your debt under control by consolidating your debts into one monthly payment.
In this blog post, we will discuss what is debt consolidation loan and how it can help you get out of debt.
What Is A Debt Consolidation Loan?
A debt consolidation loan can help you pay off your outstanding debts by combining all your unsecured debts into one single loan with a lower interest rate.
This strategy can save you money on interest payments and make it easier to pay off your debt.
Remember: Licensed money lenders in Singapore offer different loans to consolidate debt, so compare offers before deciding.
There are also other options for consolidating your debt, such as balance transfer credit cards and debt management plans. Ultimately, the best choice for you will depend on your financial situation.
But if you are struggling to make monthly payments on your outstanding debts, a debt consolidation loan could be a good solution.
How It Works
The first step is calculating your total debt, including all outstanding loans, credit card balances, and other obligations. Once you know your total debt, you can shop for debt consolidation plans that offer a lower interest rate than what you are currently paying.
That way, you can save money on interest charges and repay your debt seamlessly.
Pro tip: You will usually need a steady income to qualify for a consolidation loan.
Once your loan is approved, you will use the funds to pay off your other debts. You will be left with one monthly payment, which will be much easier to manage than multiple payments.
Warning: Paying on time and in full each month is important, or you could damage your credit score.
Here is a practical example of a person with three loans:
- First loan: $700 installment; 25% per annum interest rate; $5,000 remaining balance
- Second loan: $1,000 installment; 4% monthly interest rate; $10,000 remaining balance
- Third loan: $800 installment; 7% per annum rate; $10,000 remaining balance
Therefore, this person currently:
- Owes $25,000
- Has a combined $2,500 monthly payment and a 27% combined interest rate
Let’s also assume this person has an excellent credit score.A potential debt consolidated loan with a two-year tenure and 11% annual interest rate would look like this:
- $1,165.20 monthly installment
- $27,965 total payment
- $465 more total interest
A three-year loan tenure and 11% interest rate would change the situation like this:
- $818.47 monthly installment
- $29,465 total payment
- $1,965.00 more total interest
When You Should Opt For Debt Consolidation
If you are struggling to keep up with multiple monthly loan installments, you may browse some loans to consolidate debt. After all, it sounds more appealing to make just one payment instead of several.
However, debt consolidation is not right for everyone. Here are a few things to consider before you consolidate your debt:
- Your interest rates: Consolidating will help you save money in the long run if you pay high interest on multiple debts. But if you have low-interest debt, it is generally best to keep that separate and focus on paying off your other debts first.
- The total amount you owe: If you have just a small debt, you can consider a personal loan or a credit card withdrawal.
- The consolidated payment plan: If you are not confident that you can make just one payment each month, consolidation may not be the right choice. It is important to be realistic about your finances and create a plan you know you can stick to.
So when is it right to opt for a debt consolidation loan?
- You have several high-interest loans.
- You cannot handle your monthly installment.
- You are sure you can handle the new plan.
- You do not qualify for a personal loan with a lower interest rate.
Pros And Cons Of A Debt Consolidation Loan
A debt consolidation loan could be a good way to reduce your monthly payments and simplify your finances.
- One of the main advantages of a debt consolidation loan is having a lower monthly interest rate.
- The direct consequence is benefiting from lower installments that fit your budget seamlessly.
- You may also get a longer tenure to make those payments comfortably.
- And you will not have to worry about multiple deadlines.
Now come the drawbacks.
Extending the loan tenure means paying more in overall interest for the duration of your debt. The longer your new tenure, the more your overall interest accumulates, as seen in our above example.
Remember: That is why it is important to compare rates and tenures carefully before you commit to a new loan.
Another consideration is that a debt consolidation loan may not be able to cover all of your debts, such as:
- Secured loans
- A loan you took for a specific purpose (e.g. education, renovation, business loans, etc)
If this is the case, you will still be responsible for making payments on your other accounts.
Warning: If you use a home equity loan or line of credit to consolidate your debts, you could risk losing your home if you cannot make the payments.
So while there are some potential benefits to consolidating your debts, it is important to weigh the pros and cons carefully before you decide if this is the right option for you.
Where To Get Debt Consolidation Loans
Now you know what is debt consolidation loan, as well as its advantages and disadvantages. But where can you get one?
In Singapore, you can get debt consolidation loans from banks and licensed money lenders. One key difference between these options is the eligibility requirements.
Banks typically offer lower interest rates than money lenders but also require a good credit score to qualify. This means that if you have a poor credit history, you may not get a loan from a bank.
On the other hand, money lenders are more likely to approve loans for people with bad credit. However, they charge higher interest rates so that you will pay more in the long run.
Another difference between banks’ and money lenders’ repayment plans is the loan tenure.
Banks usually require that loans be repaid over several years, while money lenders typically have shorter repayment periods of up to three years.
Therefore debt consolidation through money lenders saves you interest in the long term, while banks’ consolidation loans offer lower monthly installments.
Finally, it is important to consider the fees associated with each type of lender.
Banks typically charge processing fees and closing costs, while money lenders usually charge higher interest rates. You will need to carefully compare the costs of each type of loan before deciding.
CCS’ Debt Consolidation Plan
The Debt Consolidation Plan (DCP) from Credit Counselling Singapore (CCS) aims to help people consolidate unsecured credit facilities:
- Credit cards
- Unsecured loans
Since a DCP is a government-backed loan, you will notice that other financial institutions may impose more stringent eligibility requirements.
Pro tip: The genuine advantage with this scheme is that CCS will help you negotiate the most convenient terms with your lenders.
Financial institutions in Singapore do not offer debt consolidation loans for:
- Loans granted under joint accounts
- Renovation loans
- Education loan
- Medical loans
- Business-related credit facilities
- Secured loans
You may also be excluded if you:
- Are a foreigner
- Earn less than $30,000 or more than $120,000 per year and your net personal assets are worth less than $2 million (through CCS DCP)
- Your accumulated loans are worth over 12 times your monthly income (through the CCS DCP scheme)
However, licensed money lenders in Singapore often do not impose a minimum wage requirement or a minimum credit rating. That means you have more chances to qualify for a debt consolidation loan with them, even though you may obtain a lower sum.
That is why research is so important.
Assess Your Debt Consolidation Loan Options Well
No matter which route you choose, it is important that you do your research and compare different lenders before making a decision. This will ensure that you are getting the best deal possible and avoid any potential pitfalls.
If you are considering consolidating your debt, speak to a Lending Bee financial advisor first. We can help you assess your options and find the best loan for your needs, with no strings attached.
Get in touch with us now or apply for a loan using your Singpass today. It just takes five minutes.
About Ashley Sim
Calling herself a “professional multi-tasker”, Ashley worked as a relationship manager in a bank for five years. She left her job just before the pandemic happened and became a freelance writer for about a year. Now, she’s making the most of her love for writing and knowledge of the banking and financial industry in her role as a content marketing lead. She hopes to help people make better financial decisions through her content and campaigns.