Last updated on July 2nd, 2021 at 04:51 pm
Perhaps many clients of banking organizations are concerned about the issue related to the problem of debt. They pay off several debts at the same time. Some of them take new loans because they are accustomed to always having cash on hand.
Whereas, some of them face very serious circumstances. The reason may be different, but having two or more current outstanding loans is a serious financial burden. To solve this problem, banks and money lenders have introduced the working concept of “Debt Consolidation”.
In simple terms, Debt consolidation is presented as an opportunity for a borrower to combine their debts into a single chain. With this procedure, the borrower combines all his loans and becomes a debtor to only one financial institution. This will not only make the payment of credit debt more convenient but this will also be considered as faster paying off loans.
The service of a consolidation loan in Singapore and other countries is usually provided by large commercial banks and money lenders that offer clients a wide range of loan solutions.
So, what else you need to know about debt consolidation? This write-up will explain in detail about debt consolidation and its various types.
What is Debt Consolidation?
Debt consolidation entails merging numerous loans into one in order to return the amount of debt. This can be done by using the advantage of personal or other types of a debt consolidation loan. Its favorable temporary structure is equipped with a lower interest rate, a lower income-to-debt ratio, tenure, etc.
Debt consolidation is possible only for unsecured debts. These can be credit card bills, student loans, and many more. Many money lender companies always understand the situation of a borrower and do everything conceivable to lessen the client’s debt.
In essence, the debtor combines loans from different financial institutions into one large loan. The need to combine current cash loans arises in cases where the borrower repays the debt to several banks. Many banks, credit unions, and money lenders also offer the services of SME business loans.
When Should You Consolidate Your Loans?
Debt consolidation is the simplest and most affordable option for changing the terms of the deal, created specifically to ease the debt burden. It is intended for borrowers who are faced with unplanned expenses. To pay off debts, a thoughtful combination of loans into one loan with optimal duration and small regular payments is the best suited. Loan consolidation can help you save money by:
- Reducing the size of regular payments.
- Revision of the payment schedule, taking into account the individual needs of the borrower.
- Decrease the total amount of over payments while reducing interest rates and the number of payments.
Some forms of consolidation can reduce monthly payments, but they also increase interest payments or payments of commissions as a result of increased installments and repayment periods.
Ultimately, the borrower will pay more money to service the loan. Therefore, it is recommended to agree on the consolidation scheme with an authorized money lender or employee of a commercial bank/credit union involved in the debt consolidation procedure. With a new debt repayment schedule optimized for the needs of the borrower, the client can easily repay previously received loans.
How are Loans Consolidated?
There are many methods of consolidating loans. But, the choice of the method of consolidating debts should be made depending on the situation. Therefore, it is recommended to clarify specific details in consultation with the financial manager of the lending company of your choice, who will help in developing the optimal program for consolidation.
Debt Consolidation Stages:
- Study of information about existing debt obligations.
- Choosing the best way to pool debts.
- Agreeing on the terms of the deal with the employees of the financial institution.
- Drawing up an updated schedule for debt repayment.
- The signing of a debt consolidation agreement
The process of paying off the debt is taking into account the new agreed conditions. The procedure will consolidate most of the borrower’s debt in order to save money and make it easier to repay loans. The specifics of the debt consolidation procedure depend on the type of debt obligations that borrowers face with payment.
Types of Debt Consolidation
1. Personal Loan
A personal loan is one of the most outspoken alternatives for combining debt if someone obtains a large enough loan for covering all the expenses. Usually, this loan is counted as an unsecured loan that is featured with an interest rate. The interest rate of a personal loan depends on the credit score.
It is considered as a valuable solution for those who have to clear the heavy debt. The personal loans are available for a fixed period of time. Generally, a personal loan is offered by online lenders.
In order to obtain such a loan, you must have a good credit history for qualifying yourself with its terms and conditions. People with poor credit history may have to face trouble in establishing a new loan.
2. Debt Relief Program
Hiring a debt relief company will not only eliminate the problem of financial burden but also provide success in paying debts. With the help of a professional negotiator, a debt relief program will make the settlement regarding finance with creditors.
There are several programs that set up an account before negotiating with creditors. This further allows you to make one convenient payment each month into this account. When your account reaches a sufficient fund, the debt relief company will connect with your creditors and make a settlement.
This type of debt consolidation will not only simplify the monthly payment but also evade taking on new debt. In addition, it will improve the chances of saving more money, plus it reduces the total amount you borrow. Therefore, it is recommended that choose an experienced debt relief company for adopting the right type of debt consolidation option.
3. Home Equity Loan
A home equity loan is also considered as the best method of reducing the burden of credit card debt. The home equity lines of credit are also identified with the term of HELCOs.
For opting this, you have to borrow money against the property of your home. The feature of this loan is similar to a credit card that enables the client to use money up to a specific limit. Make sure you have a fair amount of assets and good credit score to qualify for a loan. In this, the interest rates are lower as compared to other types of loans.
In case, if you miss the payment or do not pay it on time, then you may have to face some problems regarding your home equity. Therefore, it would be good if you use a home equity loan for removing the burden of debts.
4. Family and Friends Loan
Some people prefer to borrow some amount of money from friends, relatives, and other family members so they can consolidate debt. It may seem like an easy option of borrowing money.
In this case, you might not have to deal with fees as you have to face while obtaining a loan from a bank. In the meanwhile, borrowing money from friends and family may leave you in risk as there are no terms of the loan.
It can further leave both of you at risk, which further gives a significant hit to your relationship. But, if you cannot qualify for a consolidation program, then borrowing money from family members could be a viable option.
5. Credit Card Balance Transfer
The credit card balance transfer method permits you to move a notable balance to a new credit card with a low or 0% interest rate. The maximum availability of such introductory interest rates will be 12-21 months.
This means you have limited time to pay off all your debts. Otherwise, a higher interest rate will not take time to enter in. That is why it is essential to have a good credit score with a low-interest rate. Having a poor credit history will not give permission for a new card. Sometimes, people jump to other options that have lower credit scores or limited credit history.
Therefore, while picking a suitable debt consolidation type, you must avoid extra expenses. This will help in clearing your existing credit cards and provide maximum benefits from those cards.
Thus, debt consolidation loans are a procedure of combining several loans into one. It allows the borrower to optimize monthly payments that are made on different dates and in different ways. Consolidation of loans into one can also reduce the financial burden. This means consolidation allows you to create one common loan, and thus make the process of debt repayment more convenient. So, give preference to only professional and experienced money lenders when it comes to going with debt consolidation.