Do you have many different debts? Are you finding it hard to keep up with repayments?
If the answer to both questions is in affirmative, you might want to give debt consolidation a serious thought.
As the name suggests, debt consolidation is the process of merging all of your debts into one single debt. Let’s say you have 3 different debts at varying interest rates, and the total amount due is $10,000. You take a debt consolidation debt worth $10,000 to pay off all previous debts, leaving you with only one debt to worry about.
Combining multiple debts into one, so you only have one instalment a month is, however, not the only benefit of debt consolidation. People take a debt consolidation because that helps them save money.
Let’s continue with the above example and suppose your 3 current loans are:
Now let’s say a credit card company C is offering you a personal loan of $10000 at 12%. In such a scenario you stand to save a considerable amount of money because the interest rate of the debt consolidation loan is considerably less than the interest rate of your other loans.
There are two types of debt consolidation loans:
Debt consolidation is a good idea if:
There are a couple of things you must bear in mind when you go for debt consolidation. One, of course, is that you must take it only when it helps you save money. Two, you must be confident about making payments on time on your new loan.
You must understand that with a single loan if you miss even one month’s payment, the amount due in the next month will become very high. Paying the interest may then be an increasingly difficult problem for you. A single missed monthly payment can easily have a spiral effect, resulting in your outstanding amount rising steeply and going beyond your financial capacity.
When that happens, you can be in deep trouble. If you have taken a secured loan, you can lose your home. For unsecured loans, defaulting on the loan will result in you being blacklisted. No credit card company or licensed money lender in Singapore will then extend a loan to you.