Paying off a loan is never a fun thing to do. Pile on multiple loans and we have a headache on our hands. But don’t worry! There’s one sure way to give you the upper hand when it comes to multitasking your loan payments – a Debt Consolidation Loan.
As its name suggests, a debt consolidation loan groups together all your loan servicing under one payment. Much like refinancing, a debt consolidation loan allows you to take a step back and re-evaluate your financial commitments. Think of it as a fresh start to your monthly loan payments. It also works effectively with credit card debts.
One huge benefit to debt consolidation is a lower interest rate. We all know when debt hits us hard, it is mostly due to high-interest rates or taking on too much borrowing without factoring future financial commitments. Typically, a debt consolidation loan takes a few heavy loans or debt and combines them into one loan while extending the tenure of payment. This results in reduced interest rates. The trick, then, is to find the lowest interest rate possible.
Is a debt consolidation loan for me?
Before we move on to consider how you can benefit from a debt consolidation loan, we must look at some possibilities that should discourage you from taking one up. If you have a history of debt and are constantly in financial trouble, taking on another loan is never a good idea.
Debt consolidation also suggests that you have trouble settling loans that were granted to you. When you borrowed money and thought you could pay it back and took on more loans subsequently, this has created more debt. Now taking a debt consolidation seems like an easy way out. In some cases, you could experience a bad credit score if you take one on. But if this is your first-time doing debt consolidation and have valid reasons to take it, there should not be many adverse effects. Now that you know about the possible side effects, you may wonder how debt consolidation loans benefit you.
How does debt consolidation work?
Like any other financial instrument, we need to know how best to make use of this type of loan in any given circumstances. To do this we must understand how a debt consolidation loan works. Very simply put, if you have a couple of loans with interest, a debt consolidation loan buys over those loans.
Here’s an example:
Say you have the following and want to consolidate your debt.
- Credit card loan: RM15,000 Principle amount + 17% Interest
- Personal Loan: RM35,000 Principle amount + 15% Interest
Individually, you would be paying RM2,550 total interest for your credit card loan and RM 5,250 for your personal loan. That totals up to RM7,800.
Alternatively, you can take a debt consolidation loan with a lower interest rate such as the following that combines the principle amounts of both the debts.
- Debt consolidation loan: RM50,000 Principle amount + 14% Interest
You would pay a total of RM7,000 interest. That’s a saving of RM800. This runs on the assumption that none of your instalments are paid at the time of consolidation.
Of course, this is a conservative amount that we used as an example. Most personal loans and credit cards have a much higher interest rate and most banks have tailored their debt consolidation loans significantly lower than the original interest rates.
The use of securities
Many of us have assets and liabilities but not cash-in-hand. In debt consolidation, these assets and liabilities can be used as securities (somewhat like a guarantor) when negotiating a loan.
For example, if you consolidate a hire purchase (car loan) along with your credit card debts, you can use your car as a security. The bank consolidates your asset/liability, in this situation – your car – to hold as leverage and possibly reduce the interest rate of the payment.
You can also use stocks, shares and other investments as security for debt consolidation. Although this should only be used in desperate circumstances, it is a sure way to reduce the burden of additional loan amounts.
A debt consolidation loan may seem simple in theory, but there are facets to it that we should consider seriously. It’s best to speak to a financial advisor or bank representative for a clearer, more in-depth explanation of the options available. Keep in mind that each bank can tailor their loan to your needs, so do not settle for less.
Also, consider your credit score and other factors that contribute to your financial standing before taking on another loan. Once you’ve done that, you’ve got the green light. Go ahead and browse our debt consolidation loans available.