Debt Consolidation: Pros and Cons to Consider Before Getting a Loan

Are you having a hard time repaying your personal loans and credit card bills? If you’re struggling to stay on top of your finances, a debt consolidation plan is worth considering.

A debt consolidation plan (DCP) combines multiple debts, usually high-interest debts like credit card bills, into one payment. By getting a DCP loan, you only need to pay one institution instead of various lenders.

Many financial institutions in Singapore offer flexible debt consolidation plans, helping clients repay their loans faster and at lower interest rates. However, DCP loans aren’t for everyone. There’s still some risk involved, depending on your current financial status.

Capital Funds Investments details the pros and cons of a DCP to help you decide whether getting this loan is the best financial move for you.

Pros

1. Lower interest rates

Adding up all your debts, the combined interest rates can get very expensive, especially with credit card interests running from 25 to 29 percent per annum. These high-interest rates are the reason some Singaporeans are trapped in debt cycles.

When you get a debt consolidation plan, you’ll only need to pay the interest rate of one loan. The interest rate of a DCP also tends to be lower than that of credit cards. It significantly decreases your total spending on the loan throughout its lifetime.

2. Better financial management

Having one consolidated debt means you only have a single payment deadline to meet, instead of juggling three to four each month. This makes it easier for you to stay on top of your finances and avoid the risk of missing payment due dates.

3. Improve credit score

Two of the ways to boost your credit score in Singapore are to repay loans on time every time and avoid missing monthly payments — both of which you can achieve through a DCP. Your payment history improves the more you make timely payments, which reflects on your credit history.

Cons

1. Higher monthly payments

One of the disadvantages of a DCP loan is the potentially higher monthly instalment. Credit cards don’t have a fixed payment amount each month. You can pay the minimum amount indicated on your bill if that’s all you can afford at that time, which is about 3 percent of the outstanding amount.

On the other hand, a DCP is a personal loan that requires fixed payments each month. The instalment value can be potentially higher than what you usually pay in your credit card bills. If you’re already struggling to meet relatively low monthly instalments, a DCP loan may not be the solution for you.

There’s still a chance that a DCP can give you lower monthly payments, depending on how many active loans and credit cards you have.

2. Upfront costs

Some debt consolidation loans come with upfront fees, such as balance transfer fees, annual fees and closing costs. These additional costs can add up to your total spending throughout the lifetime of the loan.

When shopping around for a DCP loan, don’t forget to ask about the lender’s fees, including those for early cancellation and late payments.

3. Not enough to solve financial problems

Finally, a DCP loan won’t solve all of your financial problems. Some borrowers slip back into their poor financial habits once they’ve repaid their loan, which only restarts the debt cycle.

To stay debt-free and prolong the effect of your DCP, it’s crucial that you watch your spending habits and conscientiously monitor your finances. Be more conscious about where your money goes and strive to stay within a budget.

Your Trusted Financial Partner in Singapore

Capital Funds Investments is a licensed lender that connects you with urgent cash resources to alleviate your financial situation. Our variety of loans, including debt consolidation plans, give you the chance to regain control of your finances.

Contact us today to know more about our debt consolidation plan and other loan programs.