How Does Debt Consolidation Loan Work?

How Does A Debt Consolidation Loan Work?

Written by 1AP Credit on December 12, 2022

Times are uncertain these days. The high cost of living has trapped some Singaporeans in a cycle of debt. Some have multiple loans, and have trouble repaying the loans every month.

Fortunately, there’s a way out. It won’t erase your debts, but it’ll make it much easier to manage your debts.

Plus, it may even cut you some slack, especially on the monthly interest amounts and length of pay.

A debt consolidation loan in Singapore may be what you need to make paying off your debts a less stressful process. But how does debt consolidation loan work?

What Is A Debt Consolidation Loan?

A debt consolidation loan is exactly as it sounds – a loan that consolidates your loans or debts.

It’s a financial tactic of joining or merging multiple debt obligations into a single loan with more advantageous terms such as a longer payment period or lower interest rate.

In a debt management plan in Singapore, you merge all your monthly payments into one loan with a single lender instead of making individual payments to several lenders.

Debt consolidation loans are used for combining unsecured debts such as credit lines, personal loans, and credit card loans.

But note that the following cannot be covered under debt consolidation loans:

Loans granted under joint accounts
Renovation loans
Education loan
Medical loans
Business-related credit facilities
Secured loans

While debt consolidation won’t eliminate your balance, it helps reduce the cost and difficulty of settling your debt.

The other plus of debt consolidation is that it allows debtors to maintain control of their debt. After all, it’s much easier and simpler to manage the expenses of a single debt than multiple ones.

Even so, debt consolidation is only good if used correctly.

The main issue with debt consolidation loans is they free up your debt burden, making it easier for you to get mired in more debt if you’re lax in making your repayment every month.

You must shop for a good rate for a debt consolidation loan and ensure you understand the loan’s terms and conditions. As with all types of loans, there are also good and bad debt consolidation loans.

How Does Debt Consolidation Loan Work?

Debt consolidation loans are offered by various lenders such as banks and licensed money lenders.

Banks call their debt consolidation loan a debt consolidation plan, which has slightly different criteria from licensed money lenders’ debt consolidation loans.

A debt management plan in Singapore is where a single lender loans you the amounts owed to pay off all your debts. The lender adds up all your loan amounts it paid off on your behalf, after which you are left with a single loan with it.

In other words, it’s taking out a single big loan to repay all the loans.

Therefore, instead of owing money to multiple credit cards or lenders, each with a different interest rate, you consolidate it into one loan payment – hopefully with lower interest rates.

Debt consolidation may help save some money in the long run. Remember, the cost of doing the individual transactions for every loan serviced is usually a bit more expensive.

That’s why getting a single monthly bill instead of various bills for your different debts could become cheaper.

For example, let’s say you have a $13,000 student loan at 8%, $4,000 of your credit card at 24%, and $4,000 owed to another credit card.

ABC Lender will pay all your $21,000 loan ($13,000 +$4,000 +$4,000) and set you up with a new, single $21,000 loan at 7%.

ABC Lender buys out all the outstanding loans, including the accompanying balances, fees, and charges, even if they’re from different banks.

The multiple loans are now closed. Now, you need only make a monthly payment to ABC Lender, which consolidated your loans for you.

How To Use A Debt Consolidation Calculator

It’s important to do your homework before taking a debt consolidation loan Singapore. This is because some people often end up deeper in debt while trying to ease their finances with debt consolidation.

This brings us to the importance of a debt consolidation calculator.

A debt consolidation calculator helps determine if debt consolidation is a realistic and viable option for your financial situation.

The calculator helps you determine whether consolidating your debts is financially rewarding and whether debt consolidation will suit your circumstances.

Usually, typical debt consolidation calculators will compare the Annual Percentage Rate (APR) of all the combined debts with the real APR of the consolidated loan.

The calculated results will also compare the estimated monthly payments, loan tenure, and total interest paid.

So a debt calculator helps you understand whether a debt consolidation loan is a good option. It also suggests the best way of consolidating your debt and estimates the amount you can save with a debt consolidation loan.

Depending on the calculator, you can also compare loan options based on your credit score.

Ideally, the goal of debt consolidation in Singapore should be reducing the total payable interest and not so much about making a single payment.

The perfect loan should be focused on getting a lower interest and a fixed loan tenure. So the lowest APR is what you should aim for.

Also, you don’t necessarily have to consolidate all your loans.

How Much Can You Borrow?

Generally, Singapore banks will lend you an amount equivalent to all your combined loans, including the extra fees for a debt consolidation plan.

Usually, the debt consolidation loan comes with an extra 5% over the total amount of the outstanding loans. The extra amount caters to the charges you might incur when the loan is approved until the funds are deposited.

But if there’s an excess amount, it’s credited to your account or refunded to the lender.

In some cases, however, your lender might be unable to repay all the outstanding loan amounts. It’s particularly true if you’ve a bad credit score.

In the latter case, you’ll need to make payments out of pocket and directly to the institutions you borrowed from.

Qualifying Criteria

Of course, debt consolidation will still leave you at the same debt level after all is said and done.

However, instead of owing several debts at different interest rates and having a hard time keeping up with the repayment schedules, you’ll owe only the bank that consolidated your loan.

In short, the bank is taking on all your loan risks, so it checks your creditworthiness before advancing a consolidation loan. Most banks will still perform their calculations and risk assessments to determine whether the loan is worth the risk.

Generally, the debt consolidation plans in Singapore are available for citizens and permanent residents.

The other criterion for banks is you must be a salaried employee with an annual income of between $30,000 and $120,000. In addition, your debt must be more than 12 months of your annual salary.

You can only have a single debt consolidation loan at any time, but you have the option of refinancing it after three months with a different bank.

But remember that once you’re in an active debt consolidation loan, it’s impossible to apply for a new credit card until your outstanding debt is less than eight times of your monthly salary.

Where To Apply For A Debt Consolidation Loan

Currently, 14 listed financial institutions in Singapore are allowed to advance debt consolidation loans.

Some popular debt consolidation plan providers include HL Bank, American Express International, HL Bank, Standard Chartered Bank, DBS/POSB Bank, and United Overseas Bank.

You can apply to any of these banks, even if you’re not a member with them. Note that each lender has different terms, conditions, and rates for the loan. Try to push for a lender with the lowest rates.

A Debt Consolidation Loan May Be A Viable Option

So now you know how does debt consolidation loan work and are prepared to apply for one. Unfortunately, there are cases where you may not qualify the criteria for a loan advancement.

If you don’t meet the debt consolidation loan threshold, you still have other options to sort out your debts.

You could start by taking a personal loan to clear all your outstanding loans and get a reprieve from the high-interest debts.

If you need a reliable lender to offset your outstanding loan amounts with a lower-interest personal loan, contact licensed money lender 1AP Capital.

Our personal loans are available for Singaporeans and foreigners at affordable rates.