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Tips for effective debt consolidation: Your first step to being debt-free starts from money management
If you’re muddled with multiple loans and different monthly bills, chances are that your debts are snowballing and you might be struggling to keep up with the monthly repayments. While there are several solutions to resolve this, the short answer is for you to pick up proper money management skills.
For example, if you have difficulty controlling your credit card expenses, you should cut down the number of cards or even not use a credit card at all. If you have trouble keeping up with your monthly bills, that’s when GIRO and automated payments can come in handy. If you are overspending every month, start to use an expense tracker and stick to a strict budget.
However, if you’ve accumulated debts from multiple lenders and you’re barely able to pay off the monthly interest, that’s when you should consider a debt consolidation plan.
What is debt consolidation?
You may have multiple unsecured loans with different banks – these include credit card bills, credit lines, or personal loans. Compared to secured loans that are backed by assets, unsecured loans usually come with higher interest rates.
For example, interest rates on late credit card payments range from around 25.90% to 28.88% per annum while interest rates on unsecured lines of credits range from around 18.50% to 22.80% per annum. *
Debt consolidation is the combination of several unsecured debts into one monthly bill. This consolidation simplifies your loan repayment to just one bank, and you’ll usually do that to get a lower interest rate and lower monthly repayment with this new bank.
Watch our video below to find out what exactly is debt consolidation and if debt consolidation is relevant for you.
How does debt consolidation work?
Debt consolidation works by having one bank pay off all your unsecured debts, and you owe money to that bank. When that happens, all your subsequent interest and payments will be made to that bank.
Instead of struggling to repay over 20% in interest rates, you’ll enjoy interest savings with interest rates as low as 3.98% per annum, or an Effective Interest Rate of around 7.23% per annum.* With a lower interest rate, you can opt for a lower repayment amount that you are comfortable with, over a longer repayment tenure, up to 8 years.
*Interest rates are accurate as of July 2019. Look out for the Effective Interest Rateon debt consolidation plans, which comprises of the prevailing market interest rate and the additional bank interest rate, as this will be the full interest that you’ll be paying.
A debt consolidation plan is a very specific type of personal loan that is meant to help those struggling with too many unsecured, high-interest debts. As such, you’re required to have interest-bearing unsecured debts that are more than 12 times your monthly salary.
You’ll need to earn between $20,000 and $120,000 a year and have net assets of less than $2M to qualify for debt consolidation. Also, you’ll not be receiving the money with a debt consolidation plan; the bank will be paying off your unsecured debts directly. The terms and use of debt consolidation are very different from that of a personal loan or a line of credit.
Not all debts can be paid off with a debt consolidation plan. For example, car loans and home loans are secured loans backed by your car and property respectively, so they cannot be included in your plan. Other types of loans that are excluded are education loans, renovation loans, medical loans, and credit facilities granted for businesses.
Take note that debt consolidation is not debt elimination. While it simplifies the multiple debts that you need to pay, the fact is that you’re still in debt.So here are some tips on how you can manage your debts effectively if you choose to take up a debt consolidation plan.
How to manage your debts effectively
1. Choose a realistic repayment schedule
You might want to opt for a higher monthly repayment sum so that you can settle your debt quickly. However, you have to account for your other secured loans, your other commitments, and your day to day expenses.
You do not want to over-commit to your debt consolidation plan and end up struggling to pay off other secured loans, or worse, struggling to get by your daily livelihood. That is an unsustainable lifestyle for the many years ahead.
Hence, it’s important to be fully aware of your commitments and to choose a sustainable repayment schedule rather than try to pay up as quickly as possible.
2. Manage your monthly expenses
This is when budgeting and financial planning becomes extra important. You have to be aware of what your commitments are, and which are the most important financial obligations.
Which is of the highest priority? Is it repaying your secured home loan because you do not want the banks to repossess it? After listing down and prioritising your financial commitments, ask yourself how you can reduce particular expenses.
For example, if you have an outstanding car loan, ask yourself if you need a car. What are the alternative means of transport, or if a car is necessary, can you opt for a cheaper car? If you’re spending a lot on dining out, can you cut down on dining expenses by choosing cheaper options or even preparing your meals at home?
If you look at each individual expenditure, it may not seem like a huge difference e.g. whether you choose to eat at a restaurant or cook at home. It is only when you plan out your finances entirely, will you be able to see what is most important to you and in which area of your lifestyle you’re willing to make a sacrifice so as to achieve your financial goal – in this case, to be debt-free.
3. Manage your credit cards
One of the surest ways to rack up credit card bills is to take up too many cards and spend freely on them. After all, you do not have to pay the bill until the end of the month, and even then, you can just pay the minimum repayment sum. That is when things can spiral out of control.
When you fail to make your credit card payments, the late interest fees are over 25% per annum. If you continue to rack up the bills and not pay off your existing debts month over month, this amount gets compounded. The result is that you might be unable to keep up with the repaying of your credit card debts.
While credit cards are useful to earn cashback and rewards, if you do not manage your credit card bills right, it might be wiser to have just one card or none. If you’re already overspending on that one card, it is advisable to look at your spending habits and start budgeting your monthly expenses.
That is to say, set aside a sum every month for food, shopping, and other categories of expenses, and follow this budget closely. This way, you’ll be more careful about whether or not you’re exceeding your budget. If you exceed your budget for shopping this month, it’ll mean that you’ve to cut down on other expenses this month or skip shopping for the next few months.
4. Compare and choose the most suitable type of loan
Besides the differences in interest rates across debt consolidation plans, it is important to look at other terms like the tenor (repayment period), the late payment fees, the maximum you can borrow, and whether there is a credit facility provided by the bank.
Interest rates vary across banks and tenor; generally, the longer the tenor, the higher the interest rate. There is also a limit to the amount of debt you can consolidate. Most banks will also provide a credit card facility up to one times your monthly income for emergency or sudden expenses.
Depending on your needs and repayment schedule, you can easily compare across debt consolidation plans on GoBear by entering the total sum you need to pay, your expected repayment period, and your monthly salary. You’ll see a list of plans with details about your monthly repayment sum, the interest rates, and the total interest you’ll be paying.
Compare and choose carefully. It’s important to find a plan that you can pay consistently in your goal to become debt-free.