When you are drowning in a sea of debt, it can seem like there is no end in sight. Making minimum payments every month and watching the balance continue to climb can be a stressful experience. And while it might feel as though you have no other options, there is another way to deal with your debt – and this calls for debt consolidation in Singapore.
Debt comes with its own set of pros and cons. On the one hand, unsecured debt has a lower interest rate than secured debt, making it more affordable over time. Secured debt, on the other hand, typically has a lower monthly payment because it is usually secured by collateral, such as a home or car.
Anyhow, you’ll need to weigh all your options before choosing a debt consolidation strategy that works for you once you determine the pros and cons of each type of debt.
What is Debt Consolidation?
Debt consolidation plan in Singapore allows you to combine all your unsecured credit facilities, such as credit card debts, personal loans and overdrafts into one single loan at a lower interest rate. The idea behind debt consolidation is to reduce the total monthly payments you have to make by lumping all your debts together into one.
Debt consolidation is usually available as a loan with a fixed interest rate that is paid back over a certain period, usually between two and five years. While debt consolidation is often used interchangeably with the term “credit repair,” they are two different things.
Whereas debt consolidation is a tool used to lower your total debt, credit repair is a method of correcting or removing negative information from your credit report.
How Does Debt Consolidation Work?
If you decide to use debt consolidation to help you get a grip on your debt, one of the first steps is to find a licensed moneylender that offers debt consolidation.
Next, you will need to gather all your relevant financial information, such as your current debt, income, and assets.
You will also need to take note of your current interest rates and the amounts you owe on each of your current debts.
Once you and the moneylender meet these initial requirements, the next step is to create a repayment plan. Ideally, your new debt consolidation plan should fall within the range of 5-10% of your total monthly income.
After signing the necessary documents, you will be given a single monthly payment to your lender that will include both your principal and interest. These payments will be applied to the loan principal and interest until the debt is paid off.
When Should You Consolidate Your Debt?
A debt consolidation loan can be useful if you have multiple unsecured debts, such as credit cards, personal loans and would like to reduce your monthly payments.
Ideally, you should consolidate your debt when you have several different types of unsecured debt and the majority of your monthly payments are going towards interest.
As mentioned above, debt consolidation is often available as a loan with a fixed interest rate that is paid back over a certain period of time, usually between two and five years.
However, please note that the following are not included for Debt Consolidation Plan:
- Medical Loans
- Education Loans
- Joint Accounts
- Renovation Loan
- Business Loan
Also Read: Personal Loan For Low Income in Singapore
Pros of Using Debt Consolidation
A single monthly payment
The biggest pro of debt consolidation is the ability to have a single monthly payment responsible for paying off all of your debts.
This means you will have one less bill to worry about each month, which can be a huge relief for many people.
Lower interest rates
Another pro of debt consolidation is that your overall interest rates will most likely be lower than your current interest rates. This is because debt consolidation is usually done with a new loan as opposed to refinancing your current debt.
Cons of Using Debt Consolidation
Increased total debt
One con of debt consolidation is that you may end up with an increased total debt. This is because most lenders will require a down payment to be put towards your new loan. While having a lower monthly payment sounds like a good thing, it can quickly become a burden if your total debt continues to grow.
Read Also: The Smartest Ways to Consolidate Debt
Who is Eligible for Debt Consolidation Plan in Singapore?
To apply for a debt consolidation plan, you must meet the following eligibility requirements:
- Must be a Singapore Citizen or Permanent Resident (PR)
- With an annual income of at least S$20,000 to S$120,000 and net personal assets of less than S$2Million
- Have total interest-bearing unsecured debts exceeding 12 times the monthly income
Debt consolidation is a viable solution for dealing with overwhelming debt. However, this process is best suited for people who have a high level of debt and are having trouble keeping up with their monthly payments.
Debt consolidation is not a decision to rush into. It is important to consider all the pros and cons of this method before moving forward.
Also Read: Best Personal Loan in Singapore