Debt Consolidation Loan to Pay off Debts and Save Money

Debt Consolidation Loan to Pay off Debts and Save Money

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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.

What is Debt Consolidation?

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:

  • $5000 on a credit card A with interest rate of 15%
  • $4000 on a credit card B with interest rate of 20%

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.

Different types of Debt Consolidation Loans

There are two types of debt consolidation loans:

  • Unsecured – In this loan, you don’t take a loan against something. That is, the lender has no claim whatsoever on any financial asset of yours in case you default.
  • Secured – In this loan, you borrow against an asset, usually your home. So if you are unable to keep up with repayments, the lender can sell your house to get his money back.

When is Debt Consolidation a Good Idea?

Debt consolidation is a good idea if:

  • You stand to save money by combining all current debts into one single debt
  • You can keep up with the repayments until you are debt free
  • You use debt consolidation to manage your expenses more efficiently and get your finances back on track
  • You are finding it hard to keep track of multiple loans

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.

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