Consolidating your personal debts could change your repayments

Image credit: Alan Cleaver l Flickr

If you consolidate your personal debts it allows you to bring all your smaller loans together into one and could mean you could end up paying less in interest and fees. You should use debt consolidation calculator to see how much your repayments could be by bringing them together with a personal loan.

Mr Paul Ho, chief mortgage officer at iCompareLoan, said: “your personal debt does not include any home loan debt you may have.”

Having one loan usually outweighs the benefits of having a lot of little debts and this may:

  • free up some cash by reducing the amount of regular debt repayments
  • allow you to take advantage of a good deal with lower rate or fees
  • simplify your commitments by having a single repayment – meaning you’ll have a better idea of when you’ll be debt free.

When thinking of consolidating debts, examine the types of debt you have and the rates you are paying. If you are like most Singaporeans, your email box is filled with offers for credit cards, mortgage refinancing and home equity loans. Many of those offers stress the benefits of moving existing balances to the new lender. While that may sound appealing, especially if the new loan offers an attractive initial interest rate, it is important to consider all debt consolidation factors.

If you want to consolidate your personal debts remember that your debts are not completely eliminated when you choose debt consolidation.

Moving all your outstanding loan balances to one lender will not reduce the amount you owe. You must ultimately pay off the loan and pay interest until the loan is repaid. If you want to consolidate your personal debts, remember that your goal should be using debt wisely.

If you want to consolidate your personal debts, here are some reasons why it may be useful:

  • Lower rates – Different types of loans have different rates. Credit card debt usually carries higher rates than loans that are secured by an asset such as a home.
  • Lower payments – You payment is determined by the amount you are borrowing, the rate being charged and the length of time over which you are paying off the loan.
  • Tax benefits – The interest you pay on a home mortgage or home equity loan may be tax deductible while interest on credit card debt and most personal loans is not.
  • Peace of mind – Dealing with one lender, making fewer monthly payments and having a plan for paying off your total debt can reduce your financial anxiety.
  • Improve credit record – Having fewer debts and making timely payments can make it easier (and potentially cheaper) to secure loans in the future.

The starting point when thinking of consolidating debts is to determine what you have borrowed and the interest you are currently paying.

consolidate your personal debts
Image credit: Alan Cleaver l Flickr

When considering debt consolidation factors, examine the types of debt you have and the rates you are paying. Are these the types of debt you want? – There may be less expensive alternatives within the category such as replacing your credit card with one that offers lower rate. You may also wish to consider converting one type of debt into a different type that offers lower rates, such as using a lower interest rate home equity loan to pay off other more expensive types.

If you decide to replace debt with debt secured by real estate (for example, by home equity loan), consider the alternatives and remember the risks. You will be pledging your home as collateral.

When considering debt consolidation factors, investigate the attractions of Home Equity Loans if you have a private property.

  • Convenience – It easy to apply and the approval processes can be fast. The process is often simpler than if you were applying for a new mortgage. Once you are approved, the commitment acts like a line of credit. You do not have to borrow it all at once.
  • Interest rates – The interest rates charged on home equity loans are usually greater than those on first mortgages but less than those on credit cards. Often, you are only required to pay the monthly interest with the principal to be paid later.
  • Tax benefits – For many individuals that itemise their tax deductions, the interest paid on home equity loans can help save some income taxes. But there are some limits on this type of interest deduction so consult with professionals for more details.
  • Flexible uses – Even though you are borrowing against your house, there is no requirement that the money be used on your house. A home equity loan can be the source of funds for paying off credit card balances, or even to nvest in growing your business.

You owe it to yourself to determine if consolidating debts into one loan makes sense. You may be able to reduce your interest rate and if you use a home equity loan, you may be able to save some taxes. However, just like with any financial transaction, you must consider all the debt consolidation factors and risks.

Whether or not to consolidate debt is a complicated question. Debt consolidation services are for mainly for credit cards, or unsecured personal loans. This means, no “secured” debts can be included when you are doing debt consolidation – this includes house, or car payments, and any loans or accounts with collateral attached.

Only consumers having difficulty meeting monthly payment requirements or are unable to reduce their balances should apply for debt consolidation.

Written by Ravi Chandran

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