A debt consolidation plan allows you to combine all your loans into one. Essentially, it can give you a way to reduce your interest rates and fees, and help you to get out of debt. This guide covers debt consolidation plans in Singapore, including how they work and the factors you should consider before getting one.
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If you have multiple debts, such as a loan and credit card, you can take out a personal loan to cover the money you owe, then simply make repayments on the new loan. If the rate offered on the personal loan is lower than that of your other debts, you will save money through lower repayments.
However, you will need to be aware of any refinancing costs or early payout fees on your other debts, as these will also need to be paid as part of the process.
What debt can I consolidate?
It’s possible to consolidate a variety of debts using one of these loans. Common types of debt consolidation plans include the following:
This is a common type of debt that is often consolidated. You can take out a debt consolidation loan to consolidate two or more separate personal loans, a personal loan and another type of credit, or even refinance a personal loan to one with a lower rate and/or fees.
If you have a large outstanding balance due on your credit card, then you can consider taking out a personal loan to pay it off. This is often an option when you want to consolidate your credit card as well as another debt, or if you aren’t a candidate for a balance transfer.
Other credit accounts
Depending on the loan you take out, you may also be able to consolidate other types of debt. This can include private loans, debts to utility companies etc. Check with the credit provider to see what kind of debts they allow you to consolidate.
Why should you consider consolidating your credit card debt to a personal loan?
Here are the main benefits to keep in mind:
Reduce the interest you’re paying. Interest rates differ, but personal loan interest rates are typically lower than credit card interest rates.
Have a fixed repayment period. Credit cards are ongoing lines of credit, while personal loans give you a fixed date to repay your debt.
Access finance for other purposes. You can also use the personal loan to make other large purchases or to finance any other purpose you need.
Steps to using a debt consolidation plan
Once you have decided to use a debt consolidation plan, you will need to do the following:
Calculate how much you need to borrow to cover your debts. This should include any fees or charges you will have to cover in order to pay off your existing debts early.
Use the funds to pay off your other debts, along with any fees or charges.
Continue to make repayments on your personal loan until it has been repaid.
What to consider when consolidating debt with a personal loan
Affordability. You should confirm that the personal loan you use will be cheaper to pay off than your existing debts. You must also ensure that you will be able to cover the repayments on your new loan to avoid going into further debt. For example, debt consolidation plans tend to include processing fees, early termination fees and late fees that could add up quickly.
Loan term. Different debt consolidation plans come with different terms, so you should pick a plan that fits best to your schedule.
Early repayment costs. Many loans will require you to pay additional fees or charges if you repay the loan early. These will need to be paid if you wish to consolidate your debts under a new loan and should be included in your calculations to ensure debt consolidation is the right choice for you.
Legitimacy. If you decide to use the services of a credit provider or a debt consolidation organisation, it’s your responsibility to check for its Ministry of Law licensing. This is because there are brokers and credit providers who operate illegally in Singapore.
Reason for debt consolidation. Some debts cannot, and should not, be consolidated. This includes debt related to education loans, car loans, home loans, medical loans or renovation loans. In general, debt consolidation is only allowed for unsecured loans.
I have bad credit, can I still consolidate my debt?
Bad credit can strike at any time. Whether you lose your job or miss a few repayments due to illness, debt consolidation for bad credit borrowers is still possible. If you find that your repayments are spiralling out of control, debt consolidation could be for you. With the help of our guide, you could potentially get your finances back on track.
Pros and cons of debt consolidation
You can lower your costs and repayments.
No more phone calls from debt collectors.
You could avoid bankruptcy.
You could lose your property to foreclosure.
Your debt could increase.
Tips for debt consolidation
While taking out a debt consolidation loan can help reduce the interest you pay and better manage your repayments, it’s up to you to make the most of your debt consolidation efforts. The following are some useful tips you can take on to help your debt consolidation plan work best for you:
Work out a debt management plan. If you’re in a position where you need to enter a debt agreement with your creditors, it’s important to agree to a plan that is manageable for you. These agreements are informal and can be worked out between you and your credit provider. If you choose to take out a debt consolidation plan, be sure of the debt management plan you’re getting into.
Use a budget. Budgeting your debt consolidation repayments ensures that they will remain manageable over the term of the loan. How much will you need to pay each month to ensure your debt is paid off? Work your loan repayments into your budget before you take out the loan.
Compare your options. Make sure you take a look at all the options available to you before you apply for a debt consolidation plan. Are you applying for the most competitive option available? Ensure that you compare fees, rates and any additional features to see if you’re getting the best option available to you.
Make extra repayments. If your loan allows for it, making additional repayments can help see your loan paid off sooner and save interest. Make sure you won’t be charged fees for additional repayments, lump-sum payments or early repayment penalties depending on how you plan to repay your loan. If you find you’re saving considerably on interest from consolidating your debt, make sure to put those savings back into your loan.
Look for ways to cut down on your expenditure. Are there any ways you can cut down on your outgoings? By cutting down your expenditure you can have more money to make additional repayments, the benefits of which are explained above. Ensure you’re in a safe position to manage your repayments and pay back your debts.
Meet your monthly payments. Debt consolidation will affect your credit score as it is considered a form of unsecured credit. By repaying your payments on time, debt consolidation plans could improve your credit score, exposing you to more favourable loan options in the future.
Frequently asked questions about debt consolidation
As outlined on the page above, there are a few different situations that might make debt consolidation the right option for you. Before you take out a debt consolidation loan, work out what your current monthly repayments are as well as the interest rates you’re paying. Then you can consider the options you have available for your debt consolidation and see if you’ll actually save when you consolidate.
There are some definite advantages to applying with your current bank — they may be more willing to approve you because they have a past relationship with you and they can see all your incomings and outgoings. Then again, they may not be able to offer you the best deal. You may want to compare your options before you apply to see how competitive their products are. Then, speak to your bank before applying to discuss your eligibility.
A debt consolidation plan is just a standard personal loan product that allows you to consolidate your current debts into one. A debt agreement is something usually taken out by people with large debts and even bad credit history and is a form of bankruptcy. Make sure you find out the terms of the loan you’re entering into and the effect it’ll have on your credit file.
If you have equity, then this is another option you have available to you. However, there are some things to consider. First off, while rates on home loans are generally much lower than on personal loans, remember these are spread across a much longer term — thirty years as compared to a five or seven-year term. You also need to consider the costs of refinancing before you take on this kind of loan. This option might be good to consider if you have a large amount of debt to consolidate or if you find that this is the most competitive consolidation option that will help manage your debt best.
This depends on the lender you apply with. With a regular debt consolidation plan, you will not be required to change your budget, so long as you manage your repayments. With other types of debt consolidation plans, your budget may be restricted as you are technically entering into a form of bankruptcy. Keep in mind that even if you aren’t restricted, it’s always a good idea to see if there’s any way to cut back on expenses to pay off your debt faster. This can help you save on the interest.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over five years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at the IT Journalism Awards. Elizabeth has found writing about innovations in financial services to be her passion (which has surprised no one more than herself).
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