The act of combining all the money that you owe can seem to make things easier. While this could be true, other waysbesides debt consolidation may offer relief to your finances. But before digging much more profound, getting to know how debt consolidation works will enable one to make an informed decision aboutits viability.
What is A Debt Consolidation Loan?
This refers to the type of personal loan that combines all existing debts into one loan. The borrower can pay one single loan, and one interest, rather than subdividing the salary into different financiers. This enables one to organize their budget more realistically and affordably. On the same note, debt consolidation often has lower interest rates when compared to all the previous interest.
At Traditional Credit, we offer this facility to enable the borrower to access convenient loan repayments, depending on their financial ability. Restructuring the loan can also be a form of debt consolidation, and any time you feel burdened with the current loan, contact us for free advice and an easy process for the loan restructuring.
Types of Debt Consolidation Loans
They are divided into two;
- Secured– This is the circumstance under which the loan is advanced against security and, in most cases, your home. These loans are sometimes called homeowner loans. One should ensure to make the loan repayments in good time. Otherwise, you risk losing your home in case of default.
- Unsecured- This type of loan does not have any collateral.
How a Debt Consolidation Works
Since debt consolidation combines all the existing debts, one can make a loan application into one liability and continue paying it as one.
The advantage of debt consolidation is that it offers a lower interest rate, making it more convenient to repay the loan. But a point to note is that the payments for the new debt are paid until completion.
Additionally, some people consolidate their liabilities to have one lender to simplify their debts, not necessarily to have lower interest rates.
Ways of Loan Consolidation.
There are several ways by which one can consolidate existing debts. Some of these include;
Taking a Personal Loan
Banks, licensed moneylenders, and credit unions in Singapore offer this type of unsecured loan. The money is paid out as a lumpsum to enable the borrower to consolidate conveniently. The repayment is later made monthly, with a specified interest rate and a given period.
These loans generally have lower interest rates than credit card loans. If you are looking for such a loan, we will approve the loans at Tradition Credit and have your existing loans paid within a day.
If you want to pay off your existing credit card loan with your loan, ensure that you discontinue using the credit cards. Otherwise, you will land yourself into the same challenge that you had in the past.
Credit Card Loan
One can apply for a new credit card to use on the original card expenses if it offers a lower interest rate. For instance, you may find some credit cards whose introductory period has 0% APR, which can help reduce the interest considerably. But once this period ends, the interest rates are very high, and the best possible solution is to pay off the debt.
Home Equity Loan
This is a type of loan offered to homeowners who have equity. It is known as a Home equity line of credit and can be very helpful when consolidating existing loans. Since they are secured loans, they offer much lower interest rates than unsecured loans, though much higher than mortgage rates.
Risks of Debt Consolidation
While debt consolidation can be an excellent way to ease financial challenges and repayments, it can also lead you to rock bottom. First, it can affect your credit score, lowering your ability to take further loans.
Additionally, the loan may have a higher interest, for instance, if you take a more extended period to pay off the loan. Therefore, as you plan to combine the loan, confirm how much saving you will make and that the other fees are not too high to make your new loan more expensive.
Factors to Consider During Debt Consolidation
Only consider combining your loans if;
- You can make monthly repayments till the loan maturity
- The loan charges are taking no savings
- You find it a viable option and opportunity to reduce your monthly spending.
If the reverse of these points is true, then it is needless to consolidate your debts. It will only add stress to your life and mess up your budget.
What to Do if You Decide to take a Debt Consolidation Loan
Once you decide to take a debt consolidation loan, here is what to do.
- Research around and find the best lender in the market.
- Before making a final decision, engage experienced loan professionals and get information about the loan. An independent financial adviser is preferred to help you meet your financial needs.
- Do not rely on the interest rate alone. Confirm other costs such as the Annual percentage rate of charge – these are for the secured loans, and the Annual percentage rate which are the extra charges that are included during the loan application process.
Which Documents are Required to Prepare for Debt Consolidation Loan?
Just as with any other loan in Singapore, the primary documents include the following;
For Singapore Residents
- Proof of Identity – NRIC and Passport
- Proof of Income- Pay slips and bank statements
For Foreigners
- You require a work permit
- Proof of residence- Tenancy agreement, phone bills, and Utility Bills
- Pay slips or Bank statements
Debt Settlement Vs. Debt Consolidation
It is important to note that debt consolidation does not pay off your debts. Still, its main aim is to transfer the liability to a different lender and relieve one of the burdens of making huge payments to different lenders monthly.
Debt settlement, on the other hand, helps to reduce the liability obligations rather than transfer of the same Before making a decision, it is paramount to engage a credit counselor or work with debt relief organizations for further advice on your loans.
Final Thoughts
Debt consolidation is a great way to reduce interest, especially if the other lenders charge high interest. But most importantly, a professional financial advisor can do a great deal before making up your mind.