What Is A Debt Consolidation Loan?

Personal Finance

What Is A Debt Consolidation Loan?

October 14, 2022

Are you struggling to keep up with your monthly loan repayments?

Do you wish for a solution that could simplify your finances by combining all your debts into a single monthly payment?

Well, it might be time to consider a debt consolidation loan.

But what is a debt consolidation loan, and how does it exactly work?

Let’s understand its basics and see how it helps to lower your interest.

What Is A Debt Consolidation Loan?

A debt consolidation loan is a type of personal loan that allows you to repay multiple debts by consolidating them into a single loan with one monthly payment.

This can be an effective way to simplify your finances, as you’ll only need to focus on repaying a single loan instead of multiple debts.

You’ll need the following documents to apply for a debt consolidation loan in Singapore:

For Singapore citizens and permanent residents:

  • NRIC or passport
  • Central Provident Fund (CPF) or bank statements

For foreigners residing in Singapore:

  • S Pass, E Pass, or work permit
  • Tenancy agreement and utility bills as proof of residence
  • Bank statement or payslip as proof of income

How Does It Work?

A consolidation loan may seem complex, but it’s actually pretty straightforward.

You apply for a loan equal to the amount you already owe to multiple lenders (including interest and fees). When your loan gets approved, you will use the money to pay off your balances.

However, this part is then handled by your new money lender.

In return, you’ll pay just one monthly repayment to the money lender with a new interest rate. This interest rate will be lower than what you were paying collectively to your previous creditors.

Here is an example to understand it better.

Let’s say you have three different debts – a credit card balance of $2,000, a personal loan of $4,000, and a car loan of $5,000.

Instead of making three different monthly payments for each debt, you can take out a debt consolidation loan for $11,000 and use it to pay off your outstanding balances.

You’ll now only need to focus on repaying the debt consolidation loan, which will likely have a lower interest rate and monthly payment than your previous debts.

This can save you money on interest and help you become debt-free faster.

But which types of loans or debts can you consolidate?

Exclusions

Unfortunately, you can’t consolidate all kinds of loans.

The following loans can’t be included in a debt consolidation plan:

  • Renovation loans
  • Loans granted under joint accounts
  • Medical loans
  • Education loans
  • Business-related credit facilities

Where To Get Debt Consolidation Loans

You can apply for debt consolidation loans from banks, credit unions, and licensed money lenders such as Credit Thirty3.

However, comparing multiple offers is important before deciding on a lending institution, as terms and rates can vary significantly.

Here are a few things you should consider the following things before taking a debt consolidation loan:

Type Of Loan

There are two types of consolidation loans – secured and unsecured. A secured loan is backed by collateral, such as your home or car, while an unsecured loan is not.

Secured loans tend to have lower interest rates than unsecured loans, but they also carry the risk of losing your collateral if you default on the loan.

It’s essential to consider the type of loan that best suits your needs before applying.

Loan Amount

The loan amount you can qualify for will depend on your income, debts, and credit history.

It’s important only to borrow the amount you need to consolidate your debts, as taking out a larger loan will increase your monthly payments and make it more challenging to repay.

Interest Rate

The interest rate on your debt consolidation loan will affect the total cost of the loan and your monthly payments.

It’s essential to compare rates from multiple lenders to find the best deal.

Repayment Term

The repayment term is the length of time you have to repay the loan.

Longer terms will lower your monthly payments, but you’ll pay more in interest over the duration of the loan. So make sure you carefully analyse the money lender’s repayment plan.

You should also consider the fees charged by the lender, as these can add up and eat into your savings.

When Should You Opt For Debt Consolidation?

Debt consolidation could be a good option if you currently deal with multiple debts from different lenders.

It will help you lower your interest rate, keep track of your monthly payments, and pay just one loan installment instead of multiple.

You should seriously consider consolidating your debts if you:

  • Have multiple debts with high interest rates
  • Find it difficult to keep track of your multiple debts
  • Want to avoid possible late charges and interest
  • Wish to get rid of the stress of multiple payments

Pros And Cons Of A Debt Consolidation Loan

Pros

Several benefits come with consolidating your debts into a single loan.

  1. One monthly payment: When you consolidate your debts, you’ll only need to focus on making one monthly payment instead of multiple payments to different lenders. This can make budgeting and managing your finances easier.
  2. Lower interest rate: Consolidating your debts into a single loan often means getting a lower interest rate. This can save you money in the long run.
  3. Potentially improve your credit score: If you make all your payments on time, consolidating your debts can help improve your credit score over time.
  4. Become debt-free faster: Accruing less interest every month would result in more savings.

This means you might be able to pay off your loan faster if your loan agreement allows you to make large monthly repayments.

This can motivate you to stick to your repayment plan and become debt-free sooner.

Cons

There are also some potential drawbacks to consolidating your debts.

  1. You could end up paying more in interest: While a lower interest rate can save you money in the long run, consolidating your debts into a longer loan term could mean you will pay more overall interest.
  2. You might miss out on rewards: If you have a credit card with rewards, such as cashback or points, you’ll miss out on those rewards when you pay off the balance with a consolidation loan.
  3. There’s a risk of falling behind on payments: If you consolidate your debts but then fall behind on your payments, your credit score could be negatively affected. This could make it more difficult and expensive to borrow money in the future.

CCS’ Debt Consolidation Plan

Individuals struggling with monthly repayments often approach Credit Counselling Singapore (CCS) for help.

CCS is a reliable credit counselling service agency that functions as a non-profit organisation. Its credit counsellors assist debt-ridden individuals by providing effective solutions to get out of their financial predicaments.

It recommends troubled borrowers to apply for a debt consolidation plan (DCP) offered by banks.

What Is A Debt Consolidation Plan?

Like debt consolidation loans, a DCP consolidates unsecured credit facilities (such as credit cards and some unsecured loans) across multiple financial institutions in Singapore with one financial institution.

However, the plan requires borrowers to earn at least $30,000 per annum with net personal assets of less than $2 million. If not, the banks will not entertain their requests.

This is where licensed money lenders come in handy. They offer debt consolidation loans with:

  • Less strict income requirements
  • Faster application processes
  • Flexible payment terms

You now know what is a debt consolidation loan.

Still, don’t forget to compare offers from multiple lenders to find the best terms and rates when shopping for a consolidation loan.

A Debt Consolidation Loan Can Be A Viable Option

Do you have multiple debts from different lenders?

Let Credit Thirty3 consolidate your loans and help you lower interest rates and track your monthly repayments conveniently.

If you need help, contact our experienced loan officers, who will be more than happy to assist you. Or apply for a loan with us now.