Debt consolidation is one great way to make paying off your debt more manageable. Debt consolidation is a financial strategy most often used by many to take control of credit card debt, and it involves combining your loans to repay all your debts with a single monthly payment instead of paying several minimum monthly payments over a number of bills.
However, not every bill can be combined under the debt consolidation plan. Debt consolidation plans are for unsecured credit, so it excludes secured loans like car or housing loans. Debt consolidation also excludes any renovation loan, education loan, medical loan, credit facility granted for businesses or business purposes and/or outstanding debts under joint accounts.
Is it good? Is it bad? And most importantly, is it for you? Before we answer these questions, we first need to address the common misconceptions surrounding the topic of debt consolidation. Read on to debunk some of the myths about debt consolidation with us.
Myth 1: Debt Consolidation Means Less Interest
It is a common misconception that debt consolidation offers lower interest rates and saves you more money on interest.
Truth: The fact is, what you are doing is simply taking one bigger loan to pay off multiple smaller debts.
Although most people assume that paying back a single loan with a fixed interest rate results in less overall interest than multiple debts with their own individual interest rates, it depends on the interest rate differential between your original loans and your debt consolidation plan.
Most lenders would look at your credit score before determining a suitable interest rate for you. If your credit score is higher, you are more likely to get a better interest rate. Otherwise, you may have to brace for higher interest rates.
Myth 2: Debt Consolidation Leads To More Debt
One of the most dangerous pitfalls of debt consolidation is increasing your overall debt. This can happen when you use a debt consolidation loan to pay off your credit cards and then charge more payments to your credit cards.
Truth: Unfortunately, only you can debunk that myth with a solid financial plan and proper budgeting of expenses.
However, if you are able to avoid the above, debt consolidation will not land you deeper in debt. After all, debt consolidation is a debt management strategy that aims to achieve the exact opposite by helping struggling debtors break a pattern of missed payments and hefty late penalties.
With debt consolidation, you will not have to go through the hassle of dealing with multiple creditors and thus, be less likely to miss or forget a payment deadline. You will only need to make a single payment towards your debt every month.
Myth 3: Debt Consolidation Ruins Your Credit Score
Taking up a debt consolidation loan could cause your credit score to drop due to the hard credit inquiry, but this is only temporary.
Truth: In the long run, debt consolidation could even cause your credit score to increase, as you reduce the amount of money you owe and make on-time payments.
Paying off revolving lines of credit, like credit cards, can reduce the credit utilization rate reflected in your credit report. Making consistent on-time payments—and ultimately paying off the loan—can also improve your score over time.
In addition, if you did not have an instalment loan on your credit report before, your credit mix will improve after getting the debt consolidation loan, causing your credit score to go up.
Debt Consolidation VS Refinancing
Before taking up a debt consolidation loan or any other loan per se, it is always wise and advisable to check out other alternatives and options to find what best suits your needs.
If the concept of refinancing is foreign to you, check out our analysis here to learn the pros, cons and all there is to know about refinancing.
Should you consolidate or refinance your debt? To decide between debt consolidation and refinancing, you will first have to understand what each option means and the fundamental differences between the two.
Debt consolidation is used to pay off multiple debts with one lower-interest loan. Hence, you will only have one set of regular monthly payments with a fixed repayment term, instead of several different payments over an undetermined period of time.
In contrast, refinancing typically means negotiating new terms for existing debt, be it a lower interest rate or a different payment schedule. Transferring a credit card balance to another card with a 0% introductory annual percentage rate (APR) is one way to refinance credit card debt.
Hence, in what situation would be taking up a debt consolidation loan or refinancing make more sense?
If you have high-interest debt or debts with variable interest rates, especially if it is made up of balances on multiple credit cards, taking up a debt consolidation loan would make more sense, allowing you to pay off your debt faster and maybe reducing the amount you pay in interest. However, if your debt burden is smaller, it might make more sense to refinance instead.
Apart from debt consolidation loans and refinancing, there are other options to consider as well. To name a few, personal loans and personal lines of credit are some alternatives worth exploring. For a more detailed comparison, check out our in-depth analysis over here.
Best Debt Consolidation Loans to Consider in Singapore
For those interested in seeking a debt consolidation loan, we have reviewed all the debt consolidation loans in the market and rounded up the best debt consolidation loans we think best fits your needs. Listed below are some options:
HSBC Debt Consolidation Plan
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HSBC’s debt consolidation loan is the best offering in the market for borrowers seeking large or long-term debt consolidation plans. This is because HSBC charges a low-interest rate (from 3.4% p.a.), while also waiving its processing fee. For instance, for loan tenures of 1-10 years, it only charges a flat rate of 3.4%, which is cheaper than the average rate.
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Maybank Debt Consolidation Plan
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Maybank’s debt consolidation loan is worth considering due to its promotional interest rate and cashback promotion. The bank is currently offering promotional interest rates as low as 3.88% p.a., Maybank is also offering a 5% cashback promotion for new DCP customers. Therefore, if you prefer a cashback promotion, Maybank is a good choice.
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CIMB Bank Debt Consolidation Plan
CIMB’s debt consolidation plan comes with the lowest advertised flat interest rate, 2.77%. However, it charges a one-time processing fee of 1%, which makes it slightly less competitive than other debt consolidation plans. Not only that, you should note that CIMB’s rate is not guaranteed for all borrowers. CIMB’s exact language is “interest rates are as low as 2.77%,” and your approved interest rate can be materially higher than the published rate depending on your credit score.
Conclusion
It is typically not worth it to consolidate debt if you cannot get a lower interest rate than what you are already. However, if you are someone who is raking in multiple outstanding bills because you are unable to keep track of all your bills and make payments on time, you should definitely consider taking up a debt consolidation loan.
However, debt consolidation could prove to be counterproductive when you do not have a plan to pay off that debt. You will still need to be diligent with your budget and make your payments on time and in full.
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The article Debt Consolidation Loans Myths Debunked originally appeared on ValueChampion.