Debt consolidation ultimately depends on the person’s financial situation. Because you may get fast loans, but your monthly earning will be affected. But on the other hand, debt consolidation can be useful with an overall lower interest rate.
Debt consolidation is a perfect approach for you if you are struggling with multiple debts and need to manage all the bills with different interest rates, their due dates, etc.
What is Debt Consolidation?
Debt consolidation is basically a combined debt of various debts such as medical bills, pay loans, credit card bills, etc. People, who are overwhelmed with lots of debts like these, think about debt consolidation for a simplified debt-relief plan and with an illusion of a lower interest rate.
You must keep a few things in mind when you are thinking about debt consolidation:
- There is no guarantee that the interest rate will be reduced. You may get fast loans but can ultimately pay more interest over time.
- Even if you got lower interest rates on Debt consolidation, it might change by time.
- While consolidating debt, your monthly payments are lowered because the repayment period is longer. So actually debt consolidation can lead to prolonged debts.
- You must not think of debt consolidation as debt elimination.
- Debt settlement and consolidation may be different, but both of them have the potentials of money scams.
When should you consolidate your debts, and when should you not?
A successful debt consolidation strategy requires the following:
- The total amount of debt including your mortgage should not exceed 40 percent of your total income
- You must be qualified for low-interest debt consolidation loans or a 0% credit card
- Your cash flow must cover the payments of the debts, continuously.
- You should have a plan so that you can prevent further running up debt
Most of all, your credit must be suitable for debt consolidation. If you know that you can pay off your loan within the required time and have the ability to make payments on time, even after expenses of living in Singapore, then the decision of consolidation will be worth it.
When you should not consolidate
Debt consolidation is not of a ray of hope whenever you have debts on your head. It is also not a solution if you do not even have any hope of paying off your debts.
In case your debt is small, and that can be paid off in six months, or one year then there is a chance that you can save a little amount by choosing debt consolidation. But even in this situation, consolidation is not very useful. Instead, you can think about other methods like debt avalanche or debt snowball.
On the other hand, you decide whether or not to use debt consolidation by calculating your debt amount. Check if the amount is higher than half of your gross income. If that is so, then you should not even think about debt consolidation.
Debt consolidation with personal loans
When we talk about debt consolidation, then usually there are different methods. One of them is debt consolidation personal loans. In this method, one applies for a personal loan, naturally then chooses one with a low-interest rate, and he uses the loan money to pay all the credit bills at once. This way, most of your expenses accounts are paid, and now there is only one monthly expense left.
Most people require this method because it is the simplest, and generally, the loan interest rate is lower than the credit interest. The repayment period is also longer, which is why they choose to pay the loan money every month rather than paying credit bills.
So initially, you would say that the method of debt consolidation personal loans can be beneficial, but you must remember that you are paying interest for a more extended period. This means, you may end up paying even more interest over time. So, if you are in that position, then try to pay off your loan as soon as possible. Thus you may save the interest amounts you would be paying every month.
Advantages of Debt Consolidation
- Suppose you have filled with credits, then debt consolidation may relieve you, as you do not have to worry about any other debts—just one payment, which is the debt consolidation loan.
- If you are interested in lower interest rates that mean your debt consolidation is paying off sooner. So you may end up saving a few amounts.
- After paying debt consolidation every month, your credit score will improve. Credit score refers to the percentage of how frequently you are using the credit card. When your debt consolidation is done, your credit score will have low debt levels.
- The most predictable advantage of debt consolidation is, making the situation more accessible to you as you have to pay only one bill instead of several.
Disadvantages of Debt Consolidation
Just think about it; if there are only advantages of debt consolidation, then everyone would be using it. So there are a few reasons why you may not be using debt consolidation.
- First of all, your financial situation must be good enough so that you can pay your loans from time to time. Otherwise, you may end up making more debts.
- When you are repaying the loan, you must remember that there may be some money or fees associated with the repayment amount. This happens when you are paying a long term with a lower monthly interest rate. Your bank may give you relief from that money if you pay your debt sooner.
- If your credit card is already overwhelmed with your debts, maybe you will not qualify for debt consolidation. There is no point in taking a new debt if the terms and conditions are still not better than the existing ones.
- If your loans are in unmanageable situations, then your bank may not help you with the consolidation loan. Because according to the bank, in the end, you no longer have the state to pay off any debt.
If you live in a place like Singapore, then you must need a stable and robust financial base to pay off your debts, only then you will qualify for debt consolidation and get relief from your debts.
Then hopefully, the facts as mentioned above about Debt Consolidation will help you to decide whether it is worth trying or not.