Do you have multiple loans that you have to pay off every month? Are these debts causing you a great deal of worry and distress?
If so, you may want to consider taking a debt consolidation loan to pay off all your debts. But what is debt consolidation loan?
A debt consolidation loan involves consolidating all your debts into one loan, which you repay to one creditor every month for a fixed period.
The main advantage of debt consolidation is paying off what you owe at a lower interest rate and using only one loan.
This article discusses what is debt consolidation loan in detail, as well as its pros and cons.
What Is Debt Consolidation Loan?
Debt consolidation refers to the process of consolidating all your debts into one manageable loan with one lender.
Thus, instead of repaying the debts to individual creditors or money lenders, you pay it to one single creditor, often at a lower interest rate.
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.
A debt consolidation loan can be an effective strategy for managing your debts across various credit facilities such as credit cards or personal loans.
By consolidating all types of credit-based, unsecured loans into a single loan installment with one lender, you get to pay less for your monthly payment due to the lower interest rate of your newly consolidated loan.
Note that a debt consolidation plan cannot be used for:
- Business credit lines
- Business loans
- Car loans
- Education loans
- Housing loans
- Joint accounts
- Medical loans
- Renovation loans
When You Should Opt For Debt Consolidation
You should only consider debt consolidation under the following circumstances.
- You have a large amount of debt spread over different debt programmes, with varying interest rates, and from different financial institutions.
- Your debt amount is fairly large and warrants debt consolidation. If you owe a fairly small amount that can 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.
- You have a plan to get your spending in check. If you fail to review and change your spending habits before opting for debt consolidation, you may end up in even greater debt than before.
- The interest rate of your debt consolidation loan is lower than that of all your current loans. This will help you to save on interest.
- You have done your sums and concluded that your current monthly cashflow can comfortably cover the new monthly loan installment. The consolidated loan may have a lower interest rate, but if you are likely to struggle to repay the loan installment, debt consolidation may not be the best option.
How To Consolidate Your Debt
Now that you know what is debt consolidation loan, let’s look at how to apply for a debt consolidation loan.
- Look at the terms, loan amount, interest rate, and other fees on the websites of debt consolidation money lenders. List out your options.
- After assessing a few loan offers, compare them to establish the best one for your needs. Consider the ones with lower interest rates and an affordable repayment schedule. Some debt consolidation loans may have lower interest rates but higher upfront fees.
- Prepare the relevant documents that the lender will need to process your loan. You’ll need copies of your recent bank statements or CPF statements, and recent payslips. You’ll also need a tax return report if you are self-employed. Get these documents ready to avoid delays when you apply for the loan.
- Upload your documents and your formal application to the lender’s portal. Ensure that the application form is complete and well-filled. The information provided should match what your records say. You may also need to share details concerning your housing status, income, and employer.
- After your application is approved, reach out to your lender to start making payments.
How It Works
In debt consolidation, you apply for one loan that effectively consolidates your other debts so that you only have one loan that you pay monthly to one lender. You will continue paying the new lender monthly for a fixed period until you clear your debts.
In Singapore, you can apply for debt consolidation through a financial institution like a credit union, bank, or credit card company.
This is called a debt consolidation plan (DCP), a debt refinancing programme that allows you to consolidate your unsecured debt such as credit card loans or other types of debt with a single financial institution. This is a good option if you have a good repayment history with the financial institution of your choice.
However, if your financial institution doesn’t approve your application, you may consider getting a debt consolidation loan with a licensed money lender.
To apply for a debt consolidation loan with a licensed money lender, you need to:
- Be 21 to 65 old
- A Singaporean or permanent resident
- Earn a minimum of 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 are different from what banks offer. The loan tenure is usually within two to three years. In general, a debt consolidation loan is easier to obtain than a debt consolidation plan.
In contrast, 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 PR
- 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
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.
Most lenders are not averse to the idea of borrowers repaying their debts through a debt consolidation loan as such loans involve the borrower making timely payments until the whole debt is cleared.
Where To Get Debt Consolidation Loans
There are several institutions providing DCPs and debt consolidation loans in Singapore. Financial institutions providing credit cards and unsecured credit facilities are the primary sources for debt consolidation plans. You can get debt consolidation loans from licensed money lenders.
The list below consists of approved financial institutions offering debt consolidation plans.
- American Express International, Inc.
- Bank of China Limited Singapore
- CIMB Bank Berhad
- Citibank Singapore Limited
- DBS 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
These financial institutions may be added or substituted at any point.
When applying for a debt consolidation plan, you don’t have to apply to all financial institutions; just one.
We recommend you compare the terms and conditions of different institutions before making your choice.
Pros And Cons Of A Debt Consolidation Loan
- A debt consolidation loan attracts a lower interest rate than paying off multiple loans to different lenders. If you have multiple debts with interest rates of more than 10% and consolidate them into a single loan with an interest rate of less than 10%, the total interest payable will be much lower. Thus, you can save much more.
- A debt consolidation loan improves your credit score. Most borrowers who opt for debt consolidation loans benefit from a boost in their credit scores eventually. Over time, your repayment history will improve, especially if you make regular, on-time payments.
- In addition, a debt consolidation loan has a simpler repayment process. Having multiple loans with different due dates can be challenging to track. You may make late repayments for some loans or send payments to wrong accounts due to mix-ups. The money lender repayment plan adopted in debt consolidation loans relieves you of the hassle by allowing you to make your repayment to only one lender every month.
- A debt consolidation loan has higher upfront fees. Debt consolidation loan application involves several documents, including but not limited to balance transfer fees, origination fees, and closing costs. What many borrowers ignore is the cost associated with such documents. The additional fees can pile up and increase the fees you pay off to your lender, making debt consolidation loans more expensive.
- 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 end up paying more interest overall. Even if the interest rate of your debt consolidation loan is lower, you may still end up paying more for interest over the lifetime of the new loan, which may last for up to 10 years, depending on how much you owe.
- It won’t change poor spending habits. You have to be disciplined with paying the monthly installments or risk racking up more debt again.
Consider If Debt Consolidation Works For You
Now that you know what is debt consolidation loan, think about whether it is a good option for you.
If you need help or expert advice, U Credit is committed to relieving you of your financial debts and burdens.
We offer budget-friendly loan repayment schedules, reasonable rates, and flexible terms. Contact us now or apply for a loan with us today.