The myth that debt consolidation only leads to more debt traps is untrue. The argument is that the quicker you’re assisted in clearing your previous loan, the faster you’ll succumb to future debts.
Well, this is not true, the reason being debt consolidation works a lot like debt management. This means you’re ideally advised on future financial practices that will not lead you to more huge debts.
Typically, the dilemma of which is better debt consolidation or personal loan. Debt consolidation is better than a personal loan. The main reason being you pay debt consolidation loans at low interest rates.
While on the other hand, personal loans mainly have higher interest rates.
In comparison, which is better debt consolidation or personal loan? Let’s discuss other terms to understand the topic better. For instance, let’s go through the following:
- The concrete meaning of a consolidation loan
- The comparisons of a consolidation loan and a personal loan
- What you need to apply for a consolidation plan
- Where can you get a consolidation plan?
What Is A Debt Consolidation Loan?
A debt consolidation loan refers to a loan that combines all other loans you already have into one spot. It means you don’t pay several loans but instead make your loan repayments once a month.
Debt consolidation is excellent if:
- You have a good credit score
- You have high-interest loans like personal or credit card loans
- You need a more manageable repayment plan that you can follow diligently
- You have a low-income
- You have huge loan amounts
Something else is debt consolidation loans don’t allow you to make monthly payments early or late.
Paying either early or late can cause you a penalty of a fixed amount of 75% or a certain percentage of the outstanding loan balance or monthly payment you have; typically, it’s the one that’s higher.
Note a consolidation loan is not your choice if you have little or no debts.
Debt Consolidation Loan Vs Personal Loan
Here is a detailed overview of consolidation and personal loans. With this table, let’s determine which is better debt consolidation or personal loan.
| Type Of Loan | Consolidation Loan | Personal Loan |
|---|---|---|
| Loan period | Long-term | Long-term |
| Interest rates (EIR) | 6% up to 14% | 11% up to 14% |
| Maximum loan amount you can borrow | More than 12× your monthly salary | 4 - 8× your monthly salary |
| Late payment penalty fees | Yes | Yes |
| Credit check | You need a good credit score | It’s preferred you have a good credit score |
| Purpose of the loan | Lower interests of your existing loans | For personal usage |
Pros And Cons Of A Debt Consolidation Loan Vs Personal Loan
Debt consolidation loans are mainly meant to assist you in joining your other debts and lowering your interest. On the other hand, personal loans are given to cater to almost any needs you have.
Let’s discuss more benefits and cons of these two loans to compare which is better debt consolidation or personal loan.
| Pros | Cons |
|---|---|
| Lower interest rates. With a debt consolidation plan, you’ll pay lower interests than your current loans. | Higher interest rates. Interest rates might get higher with different financial institutions. Also the higher interest rates will also depend on credit score. |
| It makes your finances easier. It manages your finances and budget since you only pay for one loan instead of many. It also helps with pressure reduction of meeting deadlines and missing payments. | It’s not a guarantee you’ll remain debt-free. You’ll still have financial problems if you don’t practise diligence in your loan payments in the future. |
| Improves your debt repayment. You can repay a loan faster when you pay it with lower interest. | Some financial institutions have consolidation loans that come with upfront fees and penalty fees. |
| Improves credit score. When you reduce the balance you owe, your credit utilisation ratio gets better and, in turn, raises your credit score. | You might end up encouraging more spending. Paying off your debts in a single channel and at low interest might fool you to even spend more thinking you have more money. We encourage you to make a budget so you don’t go overboard on your monthly salary. |
| Better repayment terms. Using a debt consolidation loan, you can start over a longer repayment time with lower monthly installments. | You can face more damage if you don’t commit to monthly payments. When you take a debt consolidation loan it appears on the credit report. Which means you should pay your monthly payments to avoid penalties. |
Personal Loan
| Pros | Cons |
|---|---|
| Flexibility. Personal loans are the most flexible loans in Singapore. This means that you don't get any limitations to how you want to use the loan. | You might have higher debts. This especially happens when you avoid paying your debts diligently. |
| Fixed interest rates. Personal loans have fixed interest, meaning you pay the same monthly amount. | Might have higher interest rates. Some institutions place higher interest rates for a short period. |
| Fast loan processing. Compared to secured or traditional loans, personal loans take less than 24 hours to approve. You can even get the money the same day unless it's on a weekend or public holiday when you’re getting from a bank. | It might impose potential damage to your good credit score. Requesting loans from different institutions can risk losing points or your good credit score. |
What Is A Debt Consolidation Plan?
A debt consolidation plan gathers all your existing unsecured loans, like credit card debts, into one massive loan with just one financial organisation or bank.
The bank or financial organisation clears your current accounts and credit card bills so you can concentrate on repaying the debt consolidation loan. Remember, considering lower interest rates, the DCP loan is much easier to pay.
What To Consider Before Applying
Debt consolidation plans are only for some. When you want to apply for a loan, there are specific criteria you need to pass to be eligible. Here are some of the requirements:
- Citizenship. You can apply for a DCP if you’re a Singaporean or permanent resident
- Outstanding debt. You need to be deep in debt. For example, your current outstanding unsecured debt should be at least 12 months’ income to apply for DCP
- Financial status. You should earn a range figure of around S$20,000 and S$120,000 annually, and your net personal assets are less than S$2 million
Also, you should ensure that you have certain documents before applying. Here is a list of them:
- A copy of NRIC
- Current credit bureau report
- Current income documents
- Latest credit card or unsecured loan statements
- A confirmation writing showing your unbilled balance
Where To Get A Debt Consolidation Loan
You can get a debt consolidation loan from banks or financial institutions. Check for organisations advising you on your best plan according to your debts.
For instance, get a debt consolidation loan from U Credit. We are a licensed money lender that offers affordable loan payment schedules. Which helps our clients choose the best rates according to their monthly incomes.
On the question of which is better debt consolidation or personal loan our loan officers will ensure you pick the best plan to suit your financial situation.
Get flexible loans with low-interest rates and with a secured process at U Credit.
A Debt Consolidation Loan Is Better Than A Personal Loan
A consolidation and personal loan might sound the same since they are all loans, but the truth is, a consolidation loan works better and in your favour than a personal loan. That is the answer to which is better debt consolidation or personal loan.
A personal loan might have fewer limitations to its usage, but repaying it is not so accommodating.
While on the other hand, a consolidation loan is meant to take care of all your personal and other loans, and the repayment process favours you, especially in interest rate.
A debt consolidation loan also has a higher chance of giving you a good credit score and more extended payments.
Understand your financial situation, then go to your trusted bank or financial institution and get a consolidation loan to settle your huge debts.
