Whether you borrowed money to purchase a new house or pay for a holiday, debt happens and can rapidly spiral to high-interest rates and tough-to-manage monthly bills. While this can at times be inevitable, what counts more is how you handle the debts.
Debt consolidation is one of the top options that can simplify managing multiple debts by rolling them into a single payment plan. When compared to the aggregate cost of repaying individual debts, you will find that taking a debt consolidation loan has a lower interest rate and can help to build a better credit score. This post is a comprehensive guide to debt consolidation loans in Singapore.
How Does a Debt Consolidation Plan Work?
In Singapore, debt consolidation is used as a method of assisting Singaporeans and permanent residents who are trying to juggle several high-interest debts but finding it challenging to meet the expected payments. It's a key for a financial freedom. It is important to note that debt consolidation is only used for unsecured credit facilities, such as credit lines, personal loans, and credit card loans as opposed to secured credit.
To be eligible for a debt consolidation loan, you need to have a debt that is more than 12 times your monthly salary. When you apply for the consolidation loan, the lender provides funds equivalent to the outstanding balance that you owe. This amount includes applicable fees and charges that have accrued as a result of the debts.
In some cases, the lender might approve a loan that is less than the requested debt consolidation amount. In such a situation, you will be required to pay the balance directly to the financial institution that you had borrowed from.
Your first debt consolidation loan plan will also include an additional 5% above the total debt consolidation amount. The additional amount is used to deal with possible charges that you might have incurred between the time the consolidated loan was approved and when the money got received. The 5% allowance is given directly to the institution that you had borrowed money from, and cannot be deposited into your checking account.
Once your multiple debts are settled, you now commence paying a single loan with lower interest rate. To demonstrate how debt consolidation works, here is an example:
An individual who has multiple unsecured debts is forced to make monthly payments of $1,000. In addition to the actual cost of the loans, the amount includes additional fees, which also have to be paid every month. When the individual takes up a loan consolidation plan, all the loans are rolled into one, helping the borrower to cut down the monthly payment to $650 per month.
Although the consolidated loan’s tenure might be longer, it allows the borrower to make lower monthly payments. In addition, the borrower is liberated from high-interest rates and also gets peace of mind because he will not have to deal with multiple collection agencies.
Since the reduced monthly payments are easier for the borrower to meet, he ends up building a better credit score over time.
Special Benefits of Using Debt Consolidation Loans
If you are suffering from the burden of multiple debts and have decided to use a debt consolidation plan in Singapore, here are the main benefits that you should anticipate.
1. Ability to Turn Multiple Debts into a Single Payment
In life, people take loans to be able to invest in different things. If the multiple loans, alongside credit card debts, have varying interest rates, you are likely to be paying way higher than you should. Debt consolidation makes paying these debts simpler and might even reduce the monthly payments because of the longer loan tenure.
If part of the debt came from multiple credit cards, wrapping them into a single debt consolidation loan will feel like a huge burden has been taken off your shoulder. Although it is true that the debt has not gone away, the multiple payment deadlines will be no more. So, you will only have to deal with a single debt source.
2. Consolidated Loans Helps to Lower Interest Rates
Most unsecured debts, such as credit cards, have very high-interest rates that significantly add to your debt burden every month. By clearing off these multiple high-interest rate accounts and combining them into a single debt, you will be able to secure lower interest rates on the new single account.
When it comes to loans, especially the unsecured ones, the credit score is an important factor in defining the interest to anticipate after consolidating the debt. After consolidating your debts, you significantly improve your personal credit score, and it is possible to reduce the interest rate with a significant margin. This will be a good way to start making some savings that would have otherwise been impossible when working with multiple debts.
3. A Sure Way to Improve Your Credit Score
If you are paying multiple debts, juggling different deadlines can result in late payments and defaulting. The overall impact is a poor credit score which can compromise your ability to access credit in the future. However, debt consolidation loans can overturn the tables by giving your credit score a nice boost.
If you take a personal loan to consolidate other debts, the immediate implication is likely to raise the score in a couple of months because you will be reducing the credit utilisation ratio.
Note that immediately after taking the debt consolidation loan, the credit score might dip slightly. However, you will start seeing the positive impacts in the coming months. In the long-term, the boost to your credit score will be incredible. This could be the starting point of your journey to financial freedom.
4. Less Stress
If you talk to people with multiple debts, most of them are likely to be stressed. We agree with them that dealing with multiple creditors, managing different deadlines, and fast declining credit score alongside daily chores can be exhausting. However, a debt consolidation can take away all the stress. By taking control of your finances through debt consolidation, it is easy to stay on top of every monthly payment. The fact that you will end up in a better financial position is even more satisfying.
5. A Consolidated Loan is a Perfect Way to Clear Loan Faster
Credit card balances can have years to go before getting paid off in full. Indeed, these credit cards earn interest on the amount that you owe and lenders do not mind much if you take five or ten years to clear the debt. One of the main benefits of debt consolidation is that the process factors a number of things, including credit score, the length of the loan, and the amount owed to draw the best plan for you. As a result, debt consolidation loans come with a shorter payback time frame, which implies that you can finally anticipate a life without debts.
6. Less Risk of Collateral Repossession
When looking for a method of cutting down the interest rates on loans, some lenders might advise you to offer an asset, such as a car or house, to serve as collateral. Although it works, there is a serious danger of getting your collateral repossessed. Therefore, you should avoid going this route as much as possible. Instead, you should go for debt consolidation.
With debt consolidation Singapore, you do not have to put forward collateral to roll the current loans into one. See – there is no need to risk your house or car, but you still get to pull down the interest rates and make repaying the debts easy.
Crucial Dos and Don’ts with Debt Consolidation Loans
Debt consolidation has been demonstrated to be a good way of dealing with multiple lines of credit, but you also need to be careful with the selected plan to be successful. Here are some crucial dos and don’ts that you need to be aware of when going for a debt consolidation loan.
Compare and Identify the Consolidated Loan with Lowest Interest Rates
As we have highlighted, using debt consolidation entails taking another loan. Therefore, it is crucial to compare the interest rates and only pick the plan with the lowest one. When checking the loan’s interest rate, it is also crucial to appreciate that it is dependent on the loan tenure. A loan with a longer tenure will cost you more compared to another with a shorter tenure.
In Singapore, debt consolidation plans are offered by providers who might have additional features to help clients save money. So, make sure to also check out for extras, such as promotional rates and complimentary insurance. Although these extras should not be the primary factors when selecting a debt consolidation plan, they can make it easier for you to decide between two potential DCPs.
Do Change Your Spending Habits
A debt consolidation plan is designed to simplify how you pay off multiple loans, helping to take out juggling multiple bills and beating the due dates. However, we must say that this is only one side of the coin. To maintain a debt-free status, it is crucial to change your behaviour.
Find ways of cutting down spending and supplementing your income. For example, if you go on holiday three times every year, slashing them to one or two can help to free some money for debt repayment. You might also consider taking a part-time job to raise additional money to boost your savings.
Consider adopting these changes as part of your new financial habits even after paying the consolidated debts to increase personal savings. Furthermore, you need to regularly review your progress to be sure that the targeted objectives are being achieved.
Don’t Miss a Payment when Repaying Your Debt Repayment Loan
When you go for debt consolidation Singapore, it is important to take it like other loans and put a lot of emphasis on monthly instalments. If you miss these payments, it is very easy to undo the positives that you had accrued over time. Missed payments will not only attract penalties but can also start pulling down the credit score that you had started improving.
To avoid getting late or forgetting to repay the monthly instalments, there are two things that you can do. One, you can automate the payments, so that they are always done on time. Two, you should review personal spending to shed off unnecessary expenditure. For example, you might consider using public transport for three days of the week instead of driving. Then, direct the extra cash to clearing the debt consolidation loan.
Don’t Fall for Big Promises
When debts get too much for some people, they tend to hastily pick any plan tagged with big promises. However, you need to be careful with such "too-good-to-be-true" promises. For example, a debt repayment company that promises that you will become debt-free in only a few months after selecting a debt consolidation plan will be lying.
A good debt consolidation plan will require a lot of focus and commitment from your side. Because you have taken another loan, it is important to be prepared to carefully follow the rules, especially the monthly payments, until the last instalment. So, do not spare any effort that can improve your financial situation, especially in developing additional streams of revenue. These efforts will not only help you clear the loan faster, but also create a better financial future.
Don’t Go for a Debt Consolidation Plan without Understanding How You Got There
While it is true that using debt consolidation Singapore is a great way to get out of debt, failing to understand how you got there will be a great mistake. For example, if the bulk of your debt soared because of excess spending, there is a risk of creeping back into the old habits and getting into financial trouble. So, was the debt problem caused by overspending, high-interest rates on loans, or an emergency that crippled your source of income?
At this point, it is important to also get inspiration from other people who managed to overcome debts using debt consolidation. Reading their stories to learn how they did it, pick useful lessons, and note the mistakes to avoid.
Do You Qualify for a Debt Consolidation Loan Singapore?
In Singapore, debt consolidation loans are only available to citizens and permanent residents. In addition, you are required to have a stable income of between $30,000 and $120,000. Besides, the outstanding balances on your unsecured loans should be more than 12 times your monthly earning.
Another requirement that you need to know about is that you can only have one debt consolidation loan plan at any moment. If you opt to refinance your debt consolidation loan, some lenders in Singapore might be willing to offer some cash-back.
After enrolling in a debt consolidation loan plan, you will not be able to apply for a new loan or credit card until the outstanding debts fall to manageable levels. Most lenders demand that the debt should reduce to less than eight times your monthly salary.
How to Identify a Good Debt Consolidation Loan Lender
Now that you know the benefits of using a debt consolidation loan as well as the main dos and don’ts when handling it, it is time to identify the best lender. So, here are the main things to look for when searching for the best consolidated loan provider.
The Provider Should Have a Simple Application Process
When people turn to lenders for debt consolidation, most of them are already reeling with intensive stress. The best lender should offer a seamless process so that you can easily get the expected help with the multiple debts. With Lendela’s help, you will be able to compare the different lenders that have offered you a debt consolidation plan, as well as their procedures. This is giving you a good foundation before you decide which lender to go with.
Commitment to Helping Borrowers Overcome their Debts
Most people fall into the abyss of debt because of poor financial management. For example, instead of borrowing only what they need, they take the maximum that the lender has to offer. A good debt consolidation financial services provider should be committed to helping borrowers develop good personal finance management skills. Here is where Lendela comes in. To us, your financial situation is priority 1, and we are here to help you improve your personal finances.
We are committed to helping borrowers develop good financial habits and are happy to walk with them on the journey of discovery. Our goal is to help borrowers understand the mistakes they made and how to avoid them in the future. These new skills can be impacted through talks with our Customer Service Team, by reading our financial guides (like this one) and newsletters, and by looking through our website.
Have Multiple Financial Products
When you take a debt consolidation plan in Singapore, you are required to avoid taking further loans or new credit cards until the debt reduces to less than eight times your monthly income. After cutting down the debt to this level, you will want to start taking loans again, but more responsibly. Therefore, a good debt consolidation loan lender service should have multiple loan products, such as renovation loans, personal loans, student loans and wedding loans, so that you can continue using it in the future.
Allows for Consolidated Debt Loan Refinancing
When you select a specific debt consolidation plan with a selected lender, your credit score is likely to improve in the subsequent months. This means that you are no longer a high-risk party that the banks knew when you had several debts. Therefore, a good lender should be ready for consolidated debt loan refinancing so that you can enjoy lower interest rates.
Affordable Interest Rates
One of the main reasons that make multiple debts, especially credit card-based loans, expensive is high-interest rates. Therefore, the selected consolidated loan lender should have lower interest rates to help reduce the monthly payments and total amount repayable (TAP). Make sure to compare interest rates offered by different lenders, and only pick the plan that comes with the lowest rates. As always, Lendela is here to help you with this step.
How to Apply for a Debt Consolidation Loan in Singapore
It all starts with the application. You can easily apply for a debt consolidation plan Singapore at Lendela’s website, for free. Once you have submitted your application, here are the main steps to follow when applying for debt consolidation.
Prepare the Required Documents
Depending on which lender you decide to use for debt consolidation, the required documents might vary slightly. However, most of the time, these documents are required by the majority of debt consolidation plan lenders in Singapore.
- Latest credit bureau report that indicates your credit score.
- Photocopy of your NRIC (front and back).
- Latest income documents (last 3 months).
- Latest credit card and unsecured loan statements from your current loan providers.
- A confirmation letter indicating the unbilled balances for your unsecured credit card and instalment plans.
Wait for Debt Consolidation Loan Approval
The lender you select will review your debt consolidation loan application including the necessary documents, and if you qualify, you will be asked to sign the agreement. Lendela will help you schedule an appointment at the lender’s office for the signing and for the actual transfer to the debt consolidation plan. It is important to read the agreement carefully and plan how to adhere to all the rules. If there is something that is not clear, it is important to ask before signing the agreement.
Notably, most lenders appreciate that some costs might be incurred between the time of loan approval and when the money hits your account. Therefore, the approved funds for the debt consolidation plan might be higher by a small percentage, about 5%. This addition is released to the loan provider.
Start Repaying for the New Consolidated Loa
Once the debt consolidation plan takes effect, the money will be used to clear the existing loans so that you can start paying a single loan. Make sure to stick to the agreed repayment terms and conditions in order to enjoy all the benefits that come with using debt consolidation. After some time, draw the repayment path and check the progress of your credit score to see if it has improved significantly. If there are major changes, consider asking for debt consolidation loan refinancing.
Taking a debt consolidation loan in Singapore is the first step to changing your life. With a good plan, you will not only clear the multiple debts but also significantly pull down the high-interest rates. More importantly, you will embark on a journey to boost your credit score. With a good consolidated loan provider, you are sure of emerging from your debts as a better financial manager. Do not let those piles of debts spell doom for you – use debt consolidation to march to success!