Take a loan to clear your debts
People face several unusual circumstances, which makes them take money or services from others and due to which they end up being in debt. To solve this problem of being in debt, there is a term called debt consolidation. Debt consolidation means taking a loan to pay off the remaining liabilities and obligations. Debt consolidation does not clear off the original loan, but it transforms the debt into consumer loans to a different lender.
How dos debt consolidation work:
After a consumer is in massive debt, he/she can apply personal loan in Singapore to turn those debts into a single liability and pay off quickly. Payments are then made in the new debt till it is cleared off. Most of these consumers apply for the loan through their bank or credit card Company for the debt consolidation loan.
Banks and credit card companies mostly agree to the loan if the applicant has a good relationship and payment history with them. Still, if they turned down, the consumer then mainly applies for a moneylender consolidation loan through the private mortgage companies or lenders. The lenders are mostly happy to agree to the debt consolidation loan as it maximizes the likelihood of collecting from the debtor.
A person should always keep in mind that debt consolidation does not clear off the debt. Instead, it converts the debt into consumer loans to different lenders or types of loans. Those who do not qualify for these loans must not approach it and should go for debt relief. Debt relief reduces the consumer’s obligation rather than increasing the number of lenders.
Types of Debt Consolidation:
Debt consolidation can be broken down into two branches: secured and unsecured loans.
In a secured loan, the borrower submits one of its assets like house, car, etc. which turns into collateral for the loan.
Unsecured loans are riskier as such assets do not back them. These types of loans are difficult to obtain, and even if they found one, they tend to have a very high-interest rate and low qualifying amount.
In both cases, the interest rate is always lower than the rate asked for credit cards, and the rates are fixed, i.e., they do not increase or decrease throughout repayment.
There are several ways of these debt consolidations. Some areas followed:
- Debt Consolidation Loan
Like the banks and other lenders, the creditors agree to debt consolidation loans as part of a payment plan to the debtor who faces problems to account for the number and size of their debts. These are especially for people who look to clear off their many high-interest debts.
- Credit Cards
Another method to clear off all their prior credit card payments is to get a new credit card. It is advised to go for a new credit card that charges little or no interest for a period of time.
- Home Equity loans
Home equity loans are a different form of clearing off debts. In these types of loans, the interest is negotiable for taxpayers.
- Student Loan Programs
The government has several programs to help the students of their country financially. They offer student loans. The interest rate of these loans depends on their previous loans record. Private loans don’t qualify here.
Advantages of Debt Consolidation Loans:
As said earlier, debt consolidation is a great way to deal with several debts with a high-interest rate. With debt consolidation loans, one can benefit from a single monthly payment rather than several such payments and not forget about the low-interest rate.
If a person avoids taking any further loans from other sources, he/she will soon be debt-free. The moneylender consolidation loans help clear out the frequent calls and letters from the collecting agencies if the new loans are kept up to date.
These debt consolidation loans sometimes help in improving one’s credit score in the long run. Paying the loan’s significant portion sooner helps keep the interest payments low, which in turn improves the credit score and prevents more money from getting out from one’s pocket. A good credit score brings forth an excellent impression to the future creditors.
Sometimes, the bettor also gets a tax break. The revenue services have the policy to prevent the deduction of interest on any unsecured debt consolidation loans. But in case of secured debt consolidation loans, the debtors might qualify to receive tax breaks. Debt consolidation loans are sometimes able to deduct tax when home equity is involved.
Disadvantages of Debt Consolidation Loans:
For debt consolidation loans, a more extended timeframe for repayment means paying more amounts in the long run. Unsecured debt consolidation loans are very risky and sometimes end badly for both the creditors and debtors.
The requirement for Debt Consolidation Loans:
The debtor might have the right credit score and qualify for a debt consolidation loan if he/she is going to a new lender.
Even so, the document one is going to need to apply for debt consolidation loans in Singapore depends on credit history. The most common pieces where they can get the credit history information is the letter of employment, two months of the statement from each credit card, and other loans one wishes to pay off, along with the letter from the repayment agencies.
After receiving the debt consolidation loan, one must think about who to repay first. There is a chance that the lender makes this decision. The lender sometimes wishes to choose the order of repayment. If not, then it is wise to repay the highest interest debt first. Pay the low-interest debt first if they cause more mental or emotional stress than the high-interest debt.
Debt consolidation means clearing off several debts and converting them into a single debt. Debt consolidation loans have low-interest rates. They remove the stress of repayment to several different lenders instead of paying a single lender at a low-interest rate. The debt consolidation loan mostly keeps an asset of the borrower as collateral. The debt consolidation loan sometimes improves your credit score for future loans.