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Debt Consolidation is a great way to make it easier to pay off your debts. Debt consolidation is a financial strategy most often used by many to take control of credit card debt, and it involves combining your loans to pay off all your debts with one monthly payment instead of multiple minimum monthly payments. on a number of invoices.
However, not all bills can be consolidated under the debt consolidation plan. Debt consolidation plans are for unsecured credit, so they exclude secured loans like car or home loans. Debt consolidation also excludes any home improvement loan, education loan, medical loan, credit facility granted for business or professional purposes and/or unpaid debts on joint accounts.
Is it good? Is it bad? And above all, is it for you? Before answering these questions, we must first address the common misconceptions surrounding the subject of debt consolidation. Read on to debunk some of the myths about debt consolidation with us.
It’s a common misconception that debt consolidation offers lower interest rates and saves you more money on interest.
Truth: The thing is, what you’re doing is just taking out one bigger loan to pay off several smaller debts.
Although most people assume that paying off a single loan with a fixed interest rate results in less overall interest than multiple debts with their own individual interest rates, it depends on the interest rate differential between your initial loans and your debt consolidation plan.
Most lenders will look at your credit score before determining an interest rate that’s right for you. If your credit score is higher, you are more likely to get a better interest rate. Otherwise, you may need to prepare for higher interest rates.
One of the most dangerous pitfalls of debt consolidation is increasing your overall debt. This can happen when you use a debt consolidation loan to pay off your credit cards and then charge more payments to your credit cards.
Truth: Unfortunately, only you can debunk this myth with a solid financial plan and proper expense budgeting.
However, if you are able to avoid the above, debt consolidation will not put you further into debt. After all, debt consolidation is a debt management strategy that aims to achieve the exact opposite by helping struggling debtors break a pattern of missed payments and hefty late penalties.
With debt consolidation, you won’t have to worry about dealing with multiple creditors and you’ll be less likely to miss or forget a payment due. You will only have to make one payment for your debt each month.
Taking out a debt consolidation loan could cause your credit score to drop due to firm credit applicationbut it is only temporary.
Truth: In the long run, debt consolidation could even boost your credit score because you reduce the amount you owe and make payments on time.
Repaying revolving lines of credit, such as credit cards, can reduce the credit utilization rate reflected in your credit report. Making regular payments on time, and ultimately repaying the loan, can also improve your score over time.
Also, if you didn’t have an installment loan on your credit report before, your credit mix will improve after you get the debt consolidation loan, which will lead to an increase in your credit score.
Before taking out a debt consolidation loan or any other loan per se, it is always wise and advisable to check out other alternatives and options to find what best suits your needs.
If the concept of refinancing is foreign to you, consult our analysis here for the pros, cons and everything there is to know about refinancing.
Should you consolidate or refinance your debt? To decide between debt consolidation and refinancing, you will first need to understand what each option means and the basic differences between the two.
Debt consolidation is used to pay off multiple debts with one low interest rate loan. Therefore, you will only have one set of regular monthly payments with a fixed repayment term, instead of several different payments over an indefinite period of time.
In contrast, refinancing usually means negotiating new terms for existing debt, whether it’s a lower interest rate or a different payment schedule. Transferring the balance from one credit card to another card with an introductory annual percentage rate (APR) of 0% is one way to refinance credit card debt.
Therefore, in which situation would taking out a debt consolidation loan or refinancing make more sense?
If you have high interest rate debt or variable interest rate debt, especially if it is made up of balances on multiple credit cards, it would make more sense to take out a debt consolidation loan, which gives you would pay off your debt faster and possibly reduce the amount you pay in interest. However, if your debt is less, it might make more sense to refinance instead.
Besides debt consolidation loans and refinancing, there are also other options to consider. To name a few, personal loans and personal lines of credit are alternatives worth exploring. For a more detailed comparison, check out our in-depth analysis on here.
For those looking to get a debt consolidation loan, we have reviewed all the debt consolidation loans on the market and rounded up the best debt consolidation loans we think it best suits your needs. Here are some options:
HSBC Debt Consolidation Loan is the best deal on the market for borrowers looking for large or long-term debt consolidation plans. This is because HSBC charges a low interest rate (starting at 3.4% per annum), while waiving its processing fees. For example, for loan terms of 1 to 10 years, it only charges a flat rate of 3.4%, which is cheaper than the average rate.
Maybank Debt Consolidation Loan worth considering because of its promotional interest rate and cashback promotion. The bank currently offers promotional interest rates as low as 3.88% per annum. Maybank also offers a 5% cashback promotion for new DCP customers. Therefore, if you prefer a cashback promotion, Maybank is a good choice.
The CIMB Debt Consolidation Plan comes with the lowest advertised fixed interest rate, 2.77%. However, it charges a one-time processing fee of 1%, which makes it slightly less competitive than other debt consolidation plans. Also, you should note that the CIMB rate is not guaranteed for all borrowers. CIMB’s exact language is “interest rates are as low as 2.77%”, and your approved interest rate may be significantly higher than the published rate depending on your credit score.
It’s usually not worth consolidating debt if you can’t get a lower interest rate than what you already have. However, if you are someone who rakes in multiple unpaid bills because you are unable to keep track of all your bills and make payments on time, you should definitely consider taking out a debt consolidation loan.
However, debt consolidation could be counterproductive when you don’t have a plan to pay off that debt. You will still need to be diligent with your budget and make your payments on time and in full.
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