Having multiple debts can be overwhelming. Think of all the payments you have to make and all the details you have to keep track of. The good news? A debt consolidation plan in Singapore can help you. Under debt consolidation, several debts are joined into one larger debt, like a loan. This single loan usually has more favorable payoff terms like reduced monthly payment, reduced interest rate, or both. Learn more about debt consolidation and how it can benefit you through this guide.

How Does Debt Consolidation Work?

Debt consolidation uses different types of funding to pay various debts and liabilities. If you have different types of debt, what you can do is apply for a loan to combine your debts into one liability and then pay them. You will then make payments on the new single debt until it is fully paid.

Many people apply for a debt consolidation loan through a bank, credit card company, or credit card company. It’s a great start particularly if you got a good relationship with your financial institution. If they disapprove, you can explore lenders or private mortgage companies.

Some benefits of debt consolidation are:

• Makes it a lot easier to manage debts by combining your loans into one streamlined payment
• Could reduce a borrower’s overall interest rate
• Could lower a borrower’s overall monthly payment on debt by extending the loan term
• Fixed loan payments could help borrowers pay their debt sooner

Two Methods to Consolidate Debt

The following are the two main methods to consolidate debt.

• Get a balance-transfer credit card with 0% interest: Transfer all of your debts to this card. Then pay the full balance throughout the promotional period. To qualify for this, you will need good to excellent credit.
• Get a debt consolidation loan with a fixed rate: Use the money you got from the loan to pay your debt, then pay the loan in installments. Even if you have bad or not so good credit, you can qualify for a loan. However, borrowers with higher scores will probably qualify for the lowest rates.

Kinds of Debt Consolidation Loans

The two main debt consolidation loan types are secured loans and unsecured loans. Secured loans are supported by a borrower’s asset, like a car or a house. In turn, the asset acts as the loan’s collateral.

Meanwhile, unsecured loans are loans not supported by assets. These can be harder to obtain. Usually, they also have lesser qualifying amounts and higher interest rates.

No matter which loan type, the interest rates are usually lower than credit card interest rates. Also, the rates are fixed in most cases. This means they do not change over the repayment period.

What Do You Need to Qualify for a Debt Consolidation Plan?

You need to have credit worthiness and income to qualify for debt consolidation. This is especially a must if you’re borrowing from a new lender. The documentation type you’ll need will usually depend on your personal credit history, but the typical information includes employment letter, letters from creditors or repayment agencies, and two months’ statements for every loan or credit card you want to pay.

Once you get a debt consolidation plan in place, consider who to pay first. In many cases, this is decided by the lender. The lender also chooses the order that your creditors are paid. If not, you must pay first your debt with the highest interest. But if there is a loan with lower interest that causes you more mental and emotional stress (for example a loan that brings tension in your family relationships), you may begin with that.

When is Debt Consolidation a Wise Move?

To be successful with debt consolidation, make sure of the following conditions:

• Your total debt excluding your mortgage doesn’t go beyond 40% of your gross income.
• Your credit standing is good enough to qualify for a debt consolidation loan with low interest or 0% credit card.
• Your cash flow can consistently cover payment towards your debt.
• You have a good plan to prevent being in debt again.

When is Debt Consolidation Not Worth It?

Debt consolidation doesn’t resolve excessive spending that created the debt. Also, let’s say your debt is tiny, and at your present pace, you can pay it in several months to one year. You’d save just a tiny amount through debt consolidation, so don’t bother.

If your total debt is over half of your income, a better option would be to seek debt relief.

Applying for a debt consolidation plan can be a smart move. Be well-informed so you will not make costly financial mistakes in the future.