Ravi Chandran
For debt refinancing to be worthwhile, the monthly payment on your consolidation loan should be less than the sum of the monthly payments on your individual loans.
By: Hitesh Khan/
If you have a lot of debt, you’re not alone. Today, more and more people in Singapore are burdened with credit card and loan payments. So whether you are trying to improve your money management, having difficulty making ends meet, want to lower your monthly loan payments, or just can’t seem to keep up with all of your credit card bills, you may be looking for a way to make debt repayment easier. Debt consolidation may be the answer.
What is debt refinancing?
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Debt consolidation is when you roll all of your smaller individual loans into one large loan, usually with a longer term and a lower interest rate. This allows you to write one check for a loan payment instead of many, while lowering your total monthly payments.
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How do you consolidate your debts?
There are many ways to do debt refinancing. One way is to transfer them to a credit card with a lower interest rate. Most credit card companies allow you to transfer balances by providing them with information, such as the issuing bank, account number, and approximate balance. Or, your credit card company may send you convenience cheques that you can use to pay off your old balances. Keep in mind, however, that there is usually a fee for this type of transaction, and the lower rate may last only for a certain period of time (for example, six months).
Another option to do debt refinancing is to obtain a home equity loan.
Most banks and mortgage companies offer home equity loans. You will need to fill out an application and demonstrate to the lender that you will be able to make regular monthly payments. Your home will then be appraised to determine the amount of your equity. Typically, you can borrow an amount equal to 80 per cent of the value of the equity in your home. Interest rates and terms for home equity loans vary, so you should shop around and compare lenders.
Some lenders offer loans specifically designed for debt consolidation. Again, you will need to fill out an application and demonstrate to the lender that you will be able to make regular monthly payments. Keep in mind, however, that these loans usually come with higher interest rates than home equity loans and, depending on the amount you borrow, may require collateral on the loan.
Advantages of debt refinancing
- The monthly payment on a consolidation loan is usually substantially lower than the combined payments of smaller loans
- Consolidation loans usually offer lower interest rates
- Consolidation makes bill paying easier since you have only one monthly payment, instead of many
Disadvantages of debt refinancing
- If you use a home equity loan to consolidate your debts, the loan is secured by a lien on your home. As a result, the lender can foreclose on your home if you default on the loan.
- If the term of your consolidation loan is longer than the terms of your smaller existing loans, you may end up paying more total interest even if the rate is lower. So you won’t actually be saving any money over time, even though your monthly payments will be less.
- If you use a longer-term loan to consolidate your debts, it will take you longer to pay off your debt.
Should you refinance your debts?
For debt refinancing to be worthwhile, the monthly payment on your consolidation loan should be less than the sum of the monthly payments on your individual loans. If this is not the case, consolidation may not be your best option. Moreover, the interest rate on your consolidation loan should be lower than the average of the interest rates on your individual loans. This allows you not only to save money but also to lower your monthly payment.
Licensed money lenders who are another source for debt consolidation, may offer you personal loans as well and the law requires that they charge no more than 4% interest per month on the amount you have borrowed.
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But before you approach a licensed money lender, consider other alternatives, such as the various financial assistance schemes offered by various Government agencies. As you are legally obliged to fulfil any loan contract you enter into with a licensed moneylender, consider whether you are able to abide by the contractual terms, bearing in mind your income and financial obligations.
Borrow only what you need and are able to repay. Be mindful that if you are unable to meet the contractual terms, the late payment fees and interest payment will be a financial strain not just on yourself but also on your family. The law requires moneylenders to explain the terms of a loan to you in a language you understand and to provide you with a copy of the loan contract. Make sure you fully understand the terms of the contract, in particular, the repayment schedule, the interest rate charged and the fees applicable.
Regardless of how much of a financial crunch you are in, you should always shop around different moneylenders for the most favourable terms. You should not rush into and commit yourself to a loan until you are satisfied with the terms and conditions.
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