Imagine handling credit card loans, car loans and home loans in one go. The more things you handle, the harder it gets. Not only is it overwhelming, but you may also be paying higher interest rates.
With the skyrocketing cost of living and inflation rate, it becomes more complicated to manage your debts. Here’s what you need to know about debt consolidation and how it can help you save more and dodge the stress of juggling multiple debts:
How does debt consolidation work?
Let’s say you have a credit card loan of $4,000, and you pay $1,500 for your car loan and $3,000 for your home loan. Managing the monthly costs is already hard enough – what more if you add the differences in due date, interest rate and conditions? Things just got more stressful.
To help you keep track of your finance, you may consider consolidating them into one loan. Debt consolidation means taking out a new loan and rolling multiple debts into a single monthly repayment.
Typically, you can combine different types of loans, such as your credit card, personal, car and home, into one loan. To do this, you can refinance your home loan or take out a personal loan.
Is debt consolidation a good idea?
As always, it’s not a one-size-fits-all approach. Here are some things you can consider to know if debt consolidation will make or break your bank:
- Shop around: Compare loan products to secure a lower rate and better terms that work for you. The market is highly competitive, so don’t hesitate to shop and compare offers from various lenders. This will help you refinance to a better deal that suits you.
To avoid the hassle and headache of going through thousands of offers, we can help you. We’ll search and compare the best deals from the top 40+ banks and lenders to find the best loan that makes your budget bend instead of break.
- Compare savings and costs: While debt consolidation lowers your interest rate, be careful as you may need to pay extra fees (e.g. exit fees, valuation, etc.). Calculate whether your savings outweigh the extra costs or not. After all, debt consolidation should help you save more not spend more.
- Assess your commitment: Debt consolidation seems promising, but it is not without flaws. Since there are disadvantages, evaluate your goals and situation. For example, assess whether or not you might be tempted to take out unnecessary additional loans. This way, you can avoid mortgage stress and protect your financial situation.
To help you further decide if debt consolidation is right for you, you may want to look at the benefits and risks associated with it:
Benefits of debt consolidation
- Easier management: Since debt consolidation allows you to manage all your debts in one place, you can easily track your finance. You also gain peace of mind knowing when and how much you need to pay monthly.
- Simpler budgeting: Easier tracking also means improved budgeting. Knowing your monthly repayments helps you plan, make smart adjustments and control your budget.
- Lower interest rate: Personal loans (e.g. credit card loans) tend to have higher interest rates compared to home loans. If you consolidate all your debts into your home loan, you can enjoy lower interest rates.
For example, let’s say your credit card debt has an interest rate of 16%, and your home loan has 3.45%. Consolidating them into your home loan means you pay less interest each month and improve cash flow!
Risks of debt consolidation
- Longer repayments: While you can reduce your monthly repayments, consolidating your debts into your home loan can turn a short-term debt, like your personal loan, into a longer one. This may cause you more pain and problems if you’re not consistent and dedicated to your repayments.
- Higher interest rates: You may also end up paying more interest than you would have on your separate debts. Because you stretch the term of your personal loans, it can build up and lead to higher overall interest rates.
- Collaterals: If you consolidate your debts into your home loan, you turn your unsecured debts (e.g. credit card loans) into a secured loan. You put up your house as security, so be careful. If things go south, you may lose your home.
How does debt consolidation affect your credit?
Debt consolidation can either improve or hurt your credit depending on how you manage your loan. If you stay consistent with your repayments, this can improve your credit score. Ultimately, paying off your loan by making on-time repayments boosts your credit score.
On the flip side, some factors may negatively impact your credit score. If you don’t keep up with your repayments, this may damage your record. Also, your lender will likely check your credit, so this can badly hit your credit score.
Debt consolidation with bad credit
It’s normal to worry about your bad credit score and history as lenders may deem you high risk. So, it may be more difficult to consolidate your debts. Usually, having a high credit score helps you qualify for lower interest rates while a lower credit score leads you to higher interest rates.
To help you improve your chances of getting approved for debt consolidation, here are some things you can do:
- Review your credit standing: Get a copy of your credit file so that you can have a definite idea of your situation. This will help you determine the strategies you can do to improve your credit score.
- Check your credit file: It’s possible to have errors on your file. Assess for mistakes, and report for any inaccuracies. This allows your score to reflect your real standing.
- Pay your debts on time: Make sure you don’t miss out on your monthly repayments. Taking control of your repayments sooner can help you save money and put you in a better position.
- Avoid making many loan enquiries and applications: When you make too many hard enquiries and applications in a short period, this can hurt your credit score. The damage may not be that much, but if you add them all, it can make quite a punch.
Should you consolidate your debts?
Debt consolidation can either damage or improve your budget. With the fears of recession and unending rate hikes, now is a crucial time to check your finance to protect your today and tomorrow.
If you need help deciding whether debt consolidation is the right solution for you, our expert brokers are always here. Get expert help without paying anything! Choose from the top 40+ banks and lenders for the best loans tailored to your best interest.
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