In simple terms, debt consolidation is taking up one loan to repay all your current loans. Many people use this option to get out of debt comparatively quickly and easily.
For instance, you have two credit card loans with an interest rate of 18 and 22 percent, respectively, plus one personal loan from a licensed money lender at an interest rate of 25 percent. If you take one big loan at an interest of 17 percent to pay off all current loans, you will end up paying less, which in turn will help you become debt-free relatively quickly.
However, debt consolidation is not a magic solution to financial problems. It can be a good choice in some cases. It is ideal when you are eligible for a new loan having an interest rate lower than your current loans.
Before you opt for debt consolidation, consider its advantages and disadvantages. Also, note that not every kind of loan is eligible for debt consolidation. It can only be used to consolidate unsecured debts. Another thing to consider is that you might need a fairly good credit score to benefit from debt consolidation.
Debt consolidation helps you save money. Typically debt consolidation is used only when the interest rate of the big loan is lower than your current loans. This means you would need to pay less to get out of debt.
Debt consolidation helps you become debt free relatively quickly. As you have to pay less, you are likely to get rid of debt quickly.
Debt consolidation helps you manage your monthly installment better. Keeping track of multiple monthly installments can give you a headache and increase the chances of missing a payment. However, when you have only one monthly payment, you are not likely to have any problem in remembering to pay it on time.
Debt consolidation helps improve your credit score. With debt consolidation your overall debt, as well as monthly payment, reduces. Both have a positive effect on your credit score. When you start debt consolidation, first your credit score reduces a bit, but in the long run, it will improve.
As said above, when you enter debt consolidation, you have to pay only one payment every month. That is a good thing, right? Yes, it is, but it can also hurt you. In case you forgot to make that payment, your interest rate will increase. Worse, you might be thrown out of your debt consolidation program.
You will have to be mindful of not only the interest rate but also a few other things like prepayment penalties or balloon payments. Ensure you understand all the terms of your new loan.
When choosing a provider with debt consolidation, it is best you go with a company with a proven track record. Don’t settle with a company which is new in this field or has a questionable reputation. If you want to take a loan from a money lender, ensure that you go with a legal money lender Singapore only.