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When it comes to indebtedness, Malaysian household debt has crossed over RM1 trillion.
Reports from the Malaysia Economic Monitor of the World Bank have indicated that about 27 per cent of households in Kuala Lumpur who earn less than the estimated monthly living wage tend to take on personal financing loans and credit cards to raise their living standards.
For anyone, the worst thing about dropping down into debt is to endlessly manage a long list of creditors, deadlines and payments interests.
If you are always tired of answering frequent phone calls from credit card companies, it is time for you to consider debt consolidation.
What is debt consolidation?
Just like the name suggests, debt consolidation is a unique financial strategy where multiple bills are merged into a single debt which is then paid off through a management program or by a loan.
This unique financial strategy is effective on high-interest debts such as credit cards. For the debtor, this is helpful as it reduces the monthly payment of the bills by lowering the interest rate.
It is a known fact that many borrowers struggle to keep up with deadlines of multiple bills from different credit card companies.
The good thing about debt consolidation is that it saves the borrower from the dilemma of dealing with the bills from multiple sources and provides a great relief option to pay off to one source every month.
Believe it or not, this helps to save your money as well.
If you have an outstanding debt from more than one credit card, you can apply for a debt consolidation loan.
You can use this loan to pay off your credit card debt and then pay back the loan in monthly instalments.
The main advantage of this is:
- The interest rate of the loan will be less than that of the credit card.
- The annual percentage rate(APR) of the loans will be fixed, and you will be paying the same amount every month, unlike the credit card debt where the APR can go up and down.
What are the different types of debt consolidation?
Debt consolidation can be broadly categorised into:
- Secured loans
- Unsecured loans.
Secured loans are backed by the assets of the debtor such as a car, house etc.
On the other hand, unsecured loans are not backed by assets which are more challenging to obtain back.
When compared to the secured loans, unsecured loans usually tend to have a higher interest rate with lower qualifying amounts.
There are several ways in which you could club all your debts together into a single payment.
Let us discuss some of the most common methods used.
1. Credit cards
In this method, you could consolidate all your pending credit card payments into a new card. Credit cards will be a great option to choose if the new card charges less interest for a specific period of time.
Additionally, you could use your existing credit card’s balance transfer feature if it offers special promotions on the transaction.
2. Student loan program
For students who are struggling to pay off their debt, several consolidation options are available from banks and other financial organisations.
This will help them to pay back the loans as quickly as possible without stretching it indefinitely for a long time.
3. Home equity loans
Using home equity loans for debt consolidation could be the best route to eliminating credit card debt.
Make sure that the interest rates on a home equity loan should be significantly less than what you pay back to the credit card companies.
4. Debt consolidation loan
This is one of the most common ways used to pay off multiple debts. A debt consolidation loan is a personal loan that the debtor uses to combine multiple debts into a single debt.
The payment will be through monthly instalments.
The unique speciality of the debt consolidation loan is that most debt consolidation loans have a fixed interest rate.
This means their interest rate will never change and will have equal payments.
Say for example, you are a debtor who has a pending balance on five credit cards. With a debt consolidation loan it is possible to club all the outstanding loans. You could pay back the money in monthly instalments instead of managing five separately.
How to apply for a debt consolidation loan?
A debt consolidation loan can be availed from several sources such as banks, online lenders, credit card unions etc.
It is crucial to bear in mind that debt consolidation loans are not a way to eliminate your debt, but instead, it offers a more structured and favourable way for you to pay back the debt.
Before applying for a debt consolidation loan, it is better to do background research to ensure that you are choosing the best path to eliminate your debt.
Essential checklist to consider before applying for a debt consolidation loan
1. Identify your budget
Before applying for a debt consolidation loan, it is necessary to identify how much debt you can afford after managing the necessities such as food, transportation cost, housing, electricity bills etc.
2. Examine the bills you want to consolidate
The best thing to do before applying for these loans is to examine which all debts you wish to consolidate carefully.
Secured debts cannot be included for consolidation. This includes car loans, mortgages etc.
Debt consolidation loans deal mainly with credit card loans.
3. Take a close look at your credit score
Understanding where you stand is the key to choosing the right loan option. You can check out your credit score from various online sources to have a first-hand idea of your current financial status and have realistic expectations.
4. Order your credit report
This will have all the details of your debts such as how much has been paid back, balance amount to pay etc.
Advantages of debt consolidation
1. Provide a single payment option
With debt consolidation, you could club all your debts into one, which will result in
- Lower monthly payments
- Longer pay off period
If you are someone who has lots of pending debts, consolidating all the debts into one will make you feel that a huge weight has been lifted off from your shoulders. It is true that you still have to pay back the money you owe, but the good thing is that:
- You can focus on one payment source, &
- The deadline for multiple payments has gone.
2. Low-interest rate
The main problem with having multiple debts is that each individual debt will have an added interest to the total debt amount.
Say, for example, you have a personal loan amount with interest 29.95% p.a and debts from multiple credit cards at 26% p.a
The problem would get even worse if you missed the payment for a month, as you will have an extra interest compounded for the next month.
A debt consolidation loan will help you reduce the burden by considerably decreasing the interest rate, and you could focus on one interest rate alone.
3. Improve the credit score
One significant benefit of debt consolidation is that it will help to boost up your credit scores.
If you maintain regular payments, it can improve your credit scores. On the other hand, failing to make a payment can negatively impact your credit score and will pose a significant hurdle when you apply for a loan in the future.
A low credit score could mean:
- Increased interest rates
- Lesser chance of getting a loan
4. Fixed amount to repay
Having a well-structured debt consolidated plan will help you to better manage your finances by allowing you to pay the same amount every month.
Here you will know what to expect instead of having to suffer from a bill shock at the end of every month. You could easily pre plan your monthly expenses and allocate a budget to pay back the loan amount.
5. Less stress
Studies have shown that people who are always worried about debt face several mental problems such as anxiety and depression.
For someone who is continually running to pay off multiple debts, clubbing all the debts into one will be a great boon to alleviate stress and clear his mind.
Taking control of the finances and allowing you to pay back the debt in a single payment every month will help you to clear up your mind and gain the confidence to be in a better financial position.
6. Helps to pay back faster
Credit card companies earn by the interest you owe, and it is common for credit card balances to go unpaid for several years.
One main benefit of debt consolidation is that consolidated loans have a shorter payback period which will ensure that you will be free from the debt quite sooner instead of endlessly stretching the payback time for years.
Debt consolidation is one of the effective means to streamline your budget and to provide you with a natural alternative to pay off your debt.
Before finalizing your mode of payment, it is crucial to research the alternatives available and to choose the most effective option that will fit your budget. Get in touch with a reliable debt collector agency to get more clarity on the subject.