Personal Finance

What Is A Debt Consolidation Loan?

December 22, 2022

Are you struggling with debt, with the light at the end of the tunnel seeming so far away? Are you finding it hard to pay and keep up with the interest rates of your debts, no matter how hard you try?

Are you penny pinching every month, trying to pay back loans, but still failing to do so? If you answered “yes” to any of the above questions, we have prepared a debt consolidation article for you.

If you are wondering what is debt consolidation loan, it is a great way to pay back all your loans efficiently. Many financial institutions across the world are offering debt consolidation loans that are helpful for borrowers in paying back different kinds of loans with one efficient installment.

In this article, we will explain how you can apply for one, as well as its pros and cons.

What Is Debt Consolidation Loan?

A debt consolidation loan is a type of personal loan that helps you pay off all your other existing loans, often at a lower interest rate. It may seem counterintuitive to take out another loan to repay your previous loans but debt consolidation can help you pay off multiple debts over time when used wisely.

Simply put, a debt consolidation loan combines all your existing loans into a single loan. This way, you don’t have to pay different loan installments, on different dates, and with varying interest rates. You would only have to make a single monthly payment that would take care of all your other debts.

In Singapore, you can also opt for a debt consolidation plan (DCP), which is essentially a debt refinancing programme that enables individuals to consolidate their unsecured debt with a single financial institution. This includes credit card loans or other types of debt.

As mentioned, a debt consolidation loan can be an effective strategy that you can utilise to manage your debts across various credit facilities such as credit cards or personal loans.

It consolidates all types of credit-based, unsecured loans into a single loan installment with one lender. In this way, you pay less for your monthly payment due to the lower interest rate of your single, newly consolidated loan.

When You Should Consolidate Your Debt

Depending on your financial situation and total incurred debts, this may not be a viable option. You should only consider debt consolidation when:

  • You have a large amount of debt spread over different debt programmes, with varying interest rates, and from different financial institutions.
  • So if your debt amount is small and could be paid back in a year’s time, then consolidating your debts would not be worth the fees and credit check that come with debt consolidation.
  • While some debts occur unexpectedly, such as medical emergencies, some are simply a result of spending out of your means and careless behaviour. You must evaluate your spending habits, review your budgeting methods, and come up with a plan to control and minimise your spending before you consider debt consolidation. If you fail to get your house in order before consolidating your debts, chances are you may end up in even greater debt than before.
  • Remember that the whole point of debt consolidation is not only having one loan to manage, but to get a new loan at a better rate. So the interest rate of your debt consolidation loan should be lower than that of all your loans currently. This way, you can save significantly on the amount of money you pay for interest.
  • Only apply for debt consolidation if you think that your current monthly cashflow could comfortably cover the new monthly loan installment. You may pay a lower interest rate on your consolidated loan, but if you often struggle with paying your loan installments, then it may be difficult to pay your consolidated loan as well.

Pros and Cons Of A Debt Consolidation Loan

A debt consolidation loan is not a suitable choice for everyone. So consider your overall debts, credit score and financial situation before opting for it. Here are some of the benefits of a debt consolidation loan:

Pros

Streamlines Your Debts

As it consolidates all your separate debts into a single loan, a debt consolidation loan streamlines your finances and gives you a better picture of where you stand debt-wise.

Your worries get reduced to a single loan and interest rate, and you don’t have to worry about keeping to the payment deadlines of different loan payments throughout the month.

Improves Your Credit

A debt consolidation loan can also help improve your credit if you make all your payments on time. And if you are working towards being debt-free, it gives you the bigger picture of how much debt you have left, and how soon you can pay it all off.

It Helps You Get Debt-Free Faster

With the amount of money you save by paying less interest with a debt consolidation loan, you can try paying off bigger loan installments, hence expediting the process of getting completely debt-free.

This way, you will save even more on interest. But you must remember that a debt consolidation loan has a longer loan tenure, so you must work hard to pay your debts early if you wish to reap the benefits of a lower interest rate.

Lower Interest Rate

As explained earlier, getting a debt consolidation loan means that you are likely to get a lower interest rate than that of all your previous loans.

This can help you save money in the long run, especially if you don’t consolidate your debts with a loan tenure that is longer than it should be.

To enjoy this benefit, shop around. Take the time to find a licensed money lender that offers the best debt consolidation loan interest rates, then make your decision.

Some of your unsecured loans may have a lower interest rate than the debt consolidation loan, while others may have a higher interest rate.

So you must calculate what you are going to pay for interest as a whole when you opt for debt consolidation. An easy way to do this is to use a debt consolidation calculator.

Cons

Here are some risks associated with opting for a debt consolidation loan:

May Add Up Costs

A debt consolidation loan comes with its share of added fees such as origination fees and balance transfer fees. Always shop around for a reputable licensed money lender, negotiate, and get the lowest fees.

May Increase Interest Rate

You should only go ahead with a debt consolidation loan if it lowers the overall interest rate of your loan. If your credit score isn’t high enough to qualify you for a lower interest rate than what you are paying currently, then there isn’t much point in consolidating your debts.

You May Still Be Paying More

Even if the interest rate of your debt consolidation loan is lower, you may still end up paying more money in interest over the lifetime of the new loan as the loan tenure is likely to be quite long.

A new repayment timeline is given when you consolidate your debts, which may last for up to 10 years, depending on how much you owe.

Where Can You Apply For A Debt Consolidation Loan?

Credit unions and banks offer debt consolidation loans. Just like for any type of loan, they will check your credit score. Depending on the lender, you may have a chance of being approved even if your credit is in bad shape.

You can always seek guidance from a bank loan officer to discuss your options, as well as the rates and terms you qualify for. They will look at your overall finances, your income, credit score, circumstances, and spending habits before giving you approval.

A licensed money lender is another good resource through which you can get a debt consolidation loan.

Licensed money lenders are usually more lenient than banks when approving such loans. They can overlook your bad credit score, and are generally more lax when it comes to rules regarding eligibility. They are also quick to provide funds if your documents are in order.

However, it is crucial to only work with licensed money lenders. Look online for the Ministry of Law’s list of licensed money lenders in Singapore and use the list as a gauge.

Don’t forget to compare the interest rates, fees, and costs of a few licensed money lenders before making your choice. You can also look up customer reviews online too.

If you have found a licensed money lender that you’d like to work with, fill up the application form and submit it to the money lender’s website. If all is in good order, you may get your funds as quickly as within 24 hours.

Where Can You Apply For A Debt Consolidation Plan?

You can get a DCP from these 14 financial institutions:

  • 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

Eligibility Criteria

In Singapore, a debt consolidation loan is easier to obtain than a debt consolidation plan. A DCP:

  • Is only intended for Singaporeans and permanent residents (PRs)
  • Can cover unsecured loans with high interest rates and a total quantum of over 12 times your monthly income
  • Covers credit cards, credit lines, and personal loans
  • Has a maximum loan tenure of 10 years

To qualify for a DCP, you must:

  • Be a Singaporean or a permanent resident
  • Be earning between $30,000 to $120,000 annually
  • Have personal assets with a value of less than $2 million
  • Have unsecured debt in credit cards or personal loans that is greater than 12 times of your monthly income

In other words, unlike a standard debt consolidation loan in Singapore, a DCP does not apply to foreigners or people with total loans below 12 times of their monthly earnings.

You also cannot use a debt consolidation plan for:

  • Business credit lines
  • Business loans
  • Car loans
  • Education loans
  • Housing loans
  • Joint accounts
  • Medical loans
  • Renovation loans

Make The Right Choice For Your Circumstances

Now that you know what is debt consolidation loan, the choice to opt for a debt consolidation loan must be made after you do the necessary calculations and must be well thought through.

With a debt consolidation loan, your overall goal should be to pay less interest while repaying all your debts through a single loan without less hassle and worry, within the shortest possible timeline.

If you are looking for a debt consolidation loan, why not get one from GS Credit?

We are a licensed money lender in Singapore that offers quick loans with easy repayment terms with three easy steps.

Give us a call to know more about how we can help you save on your debts or apply for a loan now.

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