Take out a loan to pay for another loan? On the surface, the idea seems absurd but a debt consolidation loan is created specifically for that purpose. Every day, more people are discovering that a debt consolidation loan in Singapore is not only a good financial option but even their best one.
In this post, we look at why debt consolidation has become so popular, whether you qualify for one, and how you can apply.
How are debt consolidation loans different?
When we talk about debt, most of us consider the usual scenarios such as a home mortgage, car loan, credit card bills, and other personal or business loans. Each debt you incur with a different creditor, for example, a bank, credit card company, or licensed moneylender, comes with its unique terms.
Among other things, these terms dictate the:
- specific (or minimum) monthly repayment amount
- date on which that amount is due
- interest rate charged on the owed amount, and
- period of the loan
Different companies also have vastly different fees and penalties for late or missed repayments. For the average debtor who has to deal with multiple creditors, loans, and terms, this can lead to unintentional errors that cost them money.
Private debt consolidation lenders are different. They ‘buy’ loans from the various original creditors by paying off what the borrower owes. The total amount that they pay those creditors is consolidated into the principal of a single debt consolidation loan.
While the total amount that you owe does not change, there are 3 main advantages of a debt consolidation loan in Singapore.
The chief draw of debt consolidation is that it removes all the confusion of having to deal with multiple lenders and their unique requirements. With a single monthly due date and fixed instalment amount, it is easy for the debtor to know what is due and when.
It also helps to know that there is a fixed rate of interest and only one set of fees or penalties to pay in the unfortunate situation of a missed or delayed payment.
Many banks and other major financial institutions are eager to offload certain loans to private debt consolidation lenders and sell them for less than the full value. The consolidation lender is then able to offer you better terms, including a lower interest rate and/or a lower monthly repayment amount.
For borrowers who are struggling to make regular payments with their original lenders, these improved terms of debt consolidation loans are the perfect solution.
Defaulting on a loan, missing repayments, or repeatedly making delayed payments all have an effect on your credit score. Debt consolidation comes with terms more conducive for timely repayments, which makes it less likely that a borrower will ever default or miss a payment.
In this way, consolidation reduces the potential risk to your credit score. As the loan progresses, the payments also add to your creditworthiness, making it easier for you to qualify for other loans or credit cards.
Do you qualify for debt consolidation?
Simply being in debt does not qualify you for consolidation loans. Private debt consolidation lenders also consider these factors:
Number of loans
It is extremely unlikely that you will be approved for debt consolidation if you only have a single debt (just a car loan or only one credit card, etc.) Borrowers who owe multiple creditors and have several different kinds of debt are more likely to qualify.
Consolidation lenders often deal with borrowers who are having financial problems. However, they may be reluctant to extend a loan to someone who has a history of defaulting on loans. Their risk assessment often disqualifies such applicants.
However, they may also approve them but impose more stringent conditions. The lender may also choose not to include certain debts in the consolidation loan.
Applying for debt consolidation
The application process for a debt consolidation loan in Singapore is slightly longer and more complicated than that for other loans.
Applicants will need to present all the regular identification and employment documents, but also all the relevant paperwork for the loans they intend to consolidate. The lender will then contact the applicant’s creditors to transfer the loan. The length of this process may vary between institutions.
Once approved, though, the repayment and loan management process are identical to any other loan.
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