Get better control of your finances and free yourself from higher interest payments.
When you’re inundated with a mountain of debt, it often feels like your life comes crashing down.
Your thoughts are constantly spinning. You spend many hours awake night after night, worrying about if your next paycheck will be enough to cover your mortgage/rent this month or sufficient enough to provide for your family. You’re not alone. In fact, many Malaysians are living paycheck to paycheck today and the debt burdens are exacerbated since the outbreak of the pandemic.
Furthermore, between credit cards, mortgage loans and car loans, it’s not only difficult to keep track of payments and balances on outstanding debts but also stresses you to no end. In this case, there’s a popular strategy you can undertake to help you to move your mountain of debt, which is debt consolidation. Consolidating these debts into a single loan may streamline your payments and simplify accounting, but it won’t reduce your debt, so, before you embark on your debt consolidation journey, make sure it makes sense in the long run.
What is Debt Consolidation?
Debt consolidation by definition is parking all your loan obligations under a new loan with a more advantageous term structure such as fixed monthly payment, lower interest rate, etc. It is most commonly used by consumers to pay off multiple debts in one go at lower interest rates, which may give them more breathing room short term.
How Does It Work?
Debt consolidation accumulates debt balances from your various loan obligations and combines them in one single loan, thus, simplifying your payoff strategy. Debt consolidation can be done on your own, through a financial institution, a credit counselling agency, or a debt relief company
No matter the way you choose to do it, the end goal of debt consolidation is for the new debt to have a lower interest rate and a smaller, one monthly payment than your old loans combined.
Which Type of Debt You Can Consolidate?
Debt consolidation can be applied on debts that are not tied up to an asset. It is especially useful to manage revolving lines of credit and high-cost loans with steep interest rates. Some of these debt types include personal loans, credit card debts, education loans, and payday loans.
How You Should Consolidate Your Debt?
There are several solutions to consolidate debt including personal loans, credit card balance transfers, and debt management plans. However, your option is not only dependent on your credit eligibility but also on the types of debt you’re serving.
Secured debt like a mortgage or a car loan which is backed by collateral like a property or a car requires more careful considerations; meanwhile, unsecured debt such as credit cards or student loans without any asset tied to it is best suited for debt consolidation.
Below are some debt consolidation options you can pursue:
1. Debt Consolidation Loan
This is a single loan designed to pay off multiple unsecured debts. You can get this at any traditional and non-traditional financial institution depending on your credit score. Instead of paying multiple creditors, you are making a single monthly payment to only one creditor.
2. Personal Loan
Personal loan are usually unsecured, meaning you don’t need collateral to apply for one. Similar to a debt consolidation loan, in terms of requirements and lenders, the only difference is that they aren’t strictly tied to one purpose, meaning you can use the balance amount of the loan after repaying your debts for other things. It’s a good choice to consider since many personal loans have flexible tenures and high borrowing limits.
3. Credit Card Balance Transfer
Credit card balance transfer is when you transfer your multiple credit card balances to a single, lower interest card at a new bank. This is arguably one of the simplest approaches for tackling your credit card debts. The only con is that there are often balance transfer fees and possibly an annual fee.
4. Debt Management Plan
A debt management plan is an option for individuals who are struggling to manage their debts and doesn’t qualify for a debt consolidation loan. These plans are offered by credit counselling agencies such as AKPK. These repayment plans eliminate interest, consolidate debt payments into one affordable monthly payment, and ensure you are debt-free within 5 years.
How Does Debt Consolidation Impact Your Credit Scores?
Your credit score won’t be affected by having a consolidation loan if you make all your repayments in a timely manner. However, if you miss any repayments, they will be recorded in your credit score history.
When Should You Consider Consolidating Your Debts?
Debt consolidation makes sense when it brings you the following results:
- It saves you money. Aside from letting you clear the loan on time, preventing you from spending money on late repayment penalties; merging debts also should save you money by decreasing the overall interest rate of your loan.
- Your new loan repayments are affordable. Your monthly repayments shouldn’t exceed 50% of your monthly gross income and your cash flow should consistently covers your repayment towards your debt.
When Debt Consolidation Isn’t Worth It?
Debt consolidation is not the panacea for your debt problems as you will still have to plan to pay off your debt. If you can’t meet your repayments even after consolidation, it won’t help your financial situation. With that being said, here are some risks and disadvantages associated with this strategy:
- You risk missing payments. Missing payments on your debt consolidation loan will not only damage your credit score; it may also subject you to added charges.
- You may pay more in interest over time. Even you may be able to decrease your overall interest rate by consolidating debts, you could still fork out more for interest over the tenure of the new loan. The repayment timeline for your consolidation debt loan starts from day one and may stretch as long as seven years. Your overall monthly payment may be lower compared to your previous ones, but interest will accrue for a longer period of time.
Want to know if you’re financially eligible for a business loan? Talk to our advisor to find out more.
Avex Credit is a licensed money lender in Malaysia under the purview of the Ministry of Housing and Local Government and governed through Money Lenders Act 1951 and Money Lenders Act (Amended) 2003. We provide a variety of personal, mortgage and business loans that are tailored to meet your specific needs.