Are your high-interest debts taking a toll on you? Are you finding it hard to follow the monthly payment schedules of different loans? If the answer is "yes" on one or both of the above questions, taking a debt consolidation loan might be the way out.
In 2017, about 4,000 Singaporeans took unsecured debts that surpassed 12 times their regular monthly income. This number is likely to have skyrocketed by the close of 2020 because of the COVID-19 pandemic, which left trails of death and damage to businesses. In this post, we take a closer look at debt consolidation plans in Singapore to help you answer the main question, “Can it help you match to financial freedom?”
What Exactly is a Debt Consolidation Plan?
Before we can look at the main benefits of using debt consolidation, do you know what it is? This is a financing program that involves rolling multiple debts, mainly high-interest debts, into a single payment to make it easy for you to follow with the payment schedule. You take a new loan and use it to repay the other debts, meaning that you are left with only the debt consolidation loan, which you pay once every month.
Is It a Smart Move to Consolidate Your Debts?
Most people with multiple debts always ask, "Because I am adding a new loan, is it really a good idea?" The answer is "yes," and we are going to list the main benefits you should anticipate from debt consolidation.
You Convert Multiple Payments into One
If you have multiple debts, some requiring payment early in the month and others later, it can be challenging to keep up with the schedule. If you add daily chores at your workplace and other personal engagements, there is a risk of forgetting or being late with some of the payments. Remember that such delays come with serious penalties and damage to our credit score.
With a debt consolidation plan, paying debt becomes a lot easier because you only deal with one monthly payment. Most people feel like a huge burden has been put off their shoulders. Note that it is not that the debt burden has reduced, but because they no longer have to worry about juggling multiple payments.
The Possibility of Enjoying Lower Interest Rates
If you have multiple unsecured debts, especially credit card loans, they are likely to have high-interest rates that can significantly raise the amount you pay every month. When you pay off these high-interest debts and roll them into a single plan, you will be paying less in the new account, especially if your credit score is good.
You need to appreciate that whether you have a high or low credit score, the interest rate of the debt consolidation loan will be lower than what you are paying in multiple debts.
You Do Not Put Your Assets at Risk
A debt consolidation program involves taking an unsecured loan to clear the current debts and rolling them into a single monthly payment. This implies that you will not be asked for collateral, and the lender will not come for personal assets in case you are unable to pay. However, you should put a lot of effort into repaying the loan because defaulting can result in serious damage to your credit score.
You Can Avoid the Stress of Dealing with Multiple Creditors
You will agree with us that having to answer a phone call from a creditor, reminding you it is time to repay a loan, can be stressful. Now, imagine having to deal with several of them, including those who might not have very kind words. It can be pretty stressful and affect your personal life and productivity at work (what is the cost of living in Singapore?).
When you put together all the debts together through a debt consolidation plan in Singapore, you can avoid all the harassing calls. Now, you only have to deal with a single monthly payment, which is a lot more convenient than five or more. You can even ask your bank to always remit the payment money at a specific date to make following the loan schedule easy.
Understand the Following Things when Looking for a Debt Consolidation Plan
Getting a debt consolidation loan will be an excellent thing because it allows you to enjoy all the benefits we have listed in this post. It is also very important to understand the following concepts:
- Loan interest rate: This is the cost of a loan. The moment the plan is approved, you will be required to repay the debt consolidation loan plus the interest.
- Amount payable: This is the total amount that you will have paid by the end of the loan limit. It includes the loan (principal), the interest rate, and all applicable fees. If there are some penalties along the way, they will also be included.
- Loan Term: This is the period when you are expected to clear the loan. Note that the faster you can clear the loan, the less the amount payable will be. If you pick a longer period, the amount payable every month will be low, but the overall amount payable will be way higher compared to repaying the same loan in a shorter period.
Do not Fall for these Debt Consolidation Myths
While the benefits of using debt consolidation programs are indeed clear, there are so many myths online, and it is important to know and avoid them. Here are the three main ones:
- Debt Consolidation Works for All
While debt consolidation can be a good stepping stone to help you wrestle debts down, it does not work for all. Because it is a loan, you are still adding the load of the total amount required to be paid. Therefore, if you are unable to control your borrowing, this plan might not be of great help.
The best way to make a debt consolidation work for you is by developing good financial discipline. For example, you should try to establish why you fell into the problem of too many debts and avoid a repeat of a similar situation. If it proves challenging, consider seeking assistance from an expert (many loans are available like wedding loan or car loan).
- Debt Consolidation Does Not Affect Your Credit Score
This is another common misconception about debt consolidation. The truth is that, like other types of credit, the loan you take under the debt consolidation program will also affect your score. When you take the debt consolidation loan, the score is likely to dip slightly at first because of the calculation method applied by the Credit Bureau of Singapore.
Because you have already cleared most of the debts using the debt consolidation loan, the score will start to improve with time. Indeed, this improvement is likely to continue if you stick to regular monthly payments as agreed with the lender. By the time you are through clearing the loan, your credit score is likely to be very high.
We must also indicate that the plan can also pull down the credit score if you fail to repay the loan on time. For example, if you are always late with the monthly repayment, there is a risk of being slapped with serious penalties and your credit score falling sharply.
- The Process of Applying for a Debt Consolidation is Long and Complicated
This is another misconception that people have about debt consolidation plans. The main reason why people find it challenging to get debt consolidation loans is when they try to make the application on their own. Imagine having to sift through all the lenders in Singapore, their terms and conditions, and dozens of papers to prepare before making an application. But you can make the process simpler by working with a loan comparison site.
- You can Consolidate All Types of Loans
Well, this is untrue. In Singapore, not all debts can be rolled under a debt consolidation program. You can only consolidate the unsecured loans using a debt consolidation plan. However, all secured debts, such as mortgages and car loans, cannot be included in the plan.
Depending on the lender you go to for a debt consolidation loan, the amount approved might not be enough to cater for all debts. You will be required to dig deeper into the pocket to meet the additional cost of consolidation in such a situation.
- Debt Consolidation Will Instantly Get You Out of Debts
This is incorrect. When you pay multiple and high-interest debts using a debt consolidation plan, you do not get out of debt. Indeed, the overall debt load goes up significantly because you have taken another loan.
Although you get a more simplified method of paying, the debt is still there and will take some time to clear. Therefore, you can only be sure of being debt-free once the debt consolidation loan is cleared. It is important to put every focus into repaying the loan to get out of debt and improve your credit score.
What You Need to Do After Picking a Debt Consolidation Plan in Singapore
Once you get a good debt consolidation program, consider that as the starting point. Indeed, a longer journey waits ahead because you will be disallowed from taking additional loans until your debts fall to manageable levels. So, here are the main things that you need to do:
Relook at Your Monthly Budget
The moment a lender approves your budget, it marks the start of the important journey of paying the consolidation loan. Therefore, it is very important to rethink your monthly budget, factoring in not just the consolidation loan but all other debt obligations, such as mortgage payment and regular utility bills.
If you find the budget is taking too much of the money, consider instituting some austerity measures. For example, instead of driving to and from work from Monday to Saturday, consider using public transport for several days and directing the funds to pay the loan. Other possible measures that you might consider are carrying your food instead of buying from the restaurant, cutting holidays to two instead of three, and changing your diet.
Avoid Falling Back into Debt
What pushed you into a long cycle of debts? If you can establish the cause of the current problem, it might be possible to avoid its recurrence. For example, did the current high-interest debts result from impulse borrowing through credit cards or poor payment planning?
The lovely thing about understanding the cause of a problem is that you are likely to be wiser. For example, you can consider building a bigger emergency fund to cater to the unexpected costs without having to borrow more. It might also be a good idea to think of growing your revenue streams.
Target Improving Your Credit Score
Notably, most creditors always check credit scores of clients to determine their creditworthiness. Therefore, it is a great idea to think of how to improve it in order to gain access to credit at a lower interest rate. Some good examples of methods to consider for improving your score include:
- Checking your credit score report to check for errors and having them rectified: Some of these errors can be caused by omission or wrong data entry and can be rectified by pointing them out to the Credit Bureau Singapore.
- Reduce the outstanding debts: If the total amount of debt under your portfolio is very high, reducing it can help to push down your score. For example, make sure to clear other debits, such as car loans, as you faithfully follow the debt consolidation plan.
- Increase your credit mix: To give you a high credit score, the Credit Bureau Singapore also requires you to have a healthy credit mix. So, if most of your credit is in the form of credit card loans, consider enriching it with other types, such as short loans, and ensure they are paid on time. For example, you can borrow a short loan and repay in a few months to improve the credit mix and push up the score.
Apply for a Consolidation Loan Plan Through Lendela
The benefits of using debt consolidation programs outlined in this post demonstrate it is a good way to regain control over your finances. However, applying for it can be challenging because there are so many lenders in Singapore. Instead of trying to go through every lender and comparing their conditions, consider using a professional lender comparison site, such as Lendela.
Lendela makes the process simple because you do not have to fill a lot of forms or use many hours trying to get the application through. Here are the simple steps to use when applying for the loan through Lendela:
- Visit Lendela website to open an account and complete a short application form in only a few minutes.
- Lendela will provide you with offers from different lenders and help you to identify the best.
- You will be booked for an appointment to sign the debt consolidation plan.
- Finally, sign the debt consolidation program and start making a single monthly payment towards clearing it.
Do not let high–interest debts wreck down your financial health; you can regain control through debt consolidation. Make sure to work with Lendela to identify the best lender and debt consolidation loan with the lowest interest rates.