The Pros and Cons to Consider Before Going for a Debt Consolidation Loan

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So, your debt is spiralling out of control and you’re finding it increasingly difficult to combat this. You’re not the only one in a financial soup. In fact, Malaysia had one of the highest household debts in Asia in 2015, according to the McKinsey Global Institute Report on “Debt and (Not Much) Deleveraging Report.

But what do you do if you can’t even afford to pay the minimum outstanding dues? You begin looking for answers and you stumble upon a debt consolidation loan. However, this type of loan only works in your favour when you understand both the risks and the rewards involved.

Luckily for you, we’ve broken down a debt consolidation loan below. With this guide, you will understand the pros and cons involved so that you make an informed decision to find out whether such a loan works for you or not.

What is a Debt Consolidation Loan?

The Pros and Cons to Consider Before Going for a Debt Consolidation Loan

A debt consolidation loan is when you take a new loan to repay multiple high-interest loans (like credit card dues) which are combined into a single debt with more favourable pay-off terms like lower interest rates and often affordable monthly payments. The theory of this loan is that a single payment is easier to clear than multiple, spiralling payments.

Now that you’ve got an idea about how a debt consolidation loan works, let’s understand its different types.

Let’s begin with debt consolidation with a secured loan. With this loan, you tend to get lower interest rates from your lender which will likely translate to lower monthly repayments. The pitfalls? To obtain this loan, you will have to pledge an asset as security. This could be either your house, your car, etc. In case you fail to clear your loan, your lender will use your asset as a medium to pay off the loan.

An unsecured debt consolidation loan, on the other hand, doesn’t require you to put forth any asset as security. However, choosing this collateral-less loan also means settling for higher interest rates (but still lower than credit card interest rates which range between 15% to 18%). You’re also required to have a good credit score for the lender to approve the loan.

Related: 10 Important Tips to Steer Clear of Credit Card Debt

Now that you know the basics of a debt consolidation loan, let’s dig deeper and look at its pros and cons.

So what are the benefits of getting a debt consolidation loan?

The Pros and Cons to Consider Before Going for a Debt Consolidation Loan

Below is a summary of how this loan could potentially help you regain control of your finances by getting rid of your debt.

Psychological relief with a single payment and lower interest rates

To have a single payment to make instead of multiple, snowballing debts is supposed to provide psychological relief and boost self-confidence to free yourself from debt. Saving money with lower interest rates is also a major plus!

Also, the fact that a major chunk of your payments will go towards clearing off the principal amount due and not the interest component is another advantage.

Related: A 7-Step Guide to a Debt-Free Life

And the drawbacks?

A debt consolidation loan is still a loan that you need to repay in time

Yes, going for a debt consolidation loan may turn out to be a convenient and comparatively affordable option, but it doesn’t guarantee you freedom from debt unless you have proper debt reduction plans in place.

Read our blog 5 Useful Tips to Become Debt-Free for some useful insights on how to build your counter debt strategy and other tips to prioritise your debt repayments. And while you’ll still need a good credit score to apply for one, make sure that you don’t waste the money you save by paying lower interests. Use them to boost your savings or build a cash emergency fund instead.

At times you might get lower interest rates with a debt consolidation loan but the tenure will increase — meaning a longer timespan to get rid of your debt. Plus, if you’ve put a collateral (like your house or car) to further reduce the interest, you stand the risk of losing them if you’re unable to pay off the loan.

Related: 6 Scenarios When Getting a Personal Loan May Not Be a Good Idea

Choosing the right debt consolidation loan for your needs

Now that you know the pluses and the pitfalls you can expect with this type of loan, let’s understand how you can choose the right loan for yourself.

Below we’ve broken down 3 debt consolidation plans from three different lenders in Malaysia to help you gauge the eligibility, the requirements, and how it can help you in the long run.

Citi Debt Consolidation Loan

Image source: Citibank Malaysia

There are a few eligibility boxes you need to check before applying for this loan. One, you need to be at least 21 years of age with a minimum income of RM48,000 a year. Two, you will need to hold any bank’s financial product like a credit card or a personal loan for more than 24 months.

Once you qualify, you can consolidate up to 5 outstanding loans, starting from a minimum total debt amount of RM5,000 to RM150,000 for up to 5 years. The current effective rate of interest stands between 11.90% – 12.90% per annum.

With the Citi Debt Consolidation Loan, you can get a loan amount of up to 10x your gross monthly income.

Click here for more information and document requirements about this product

Related: 5 Signs You’re a Shopaholic, and Simple Tips to Fix the Problem

Alliance CashFirst Personal Loan

To be eligible for this loan, you must have a minimum income of RM36,000 per annum or RM3,000 per month. You’re also required to be a Malaysian or a permanent resident working and residing in Malaysia.

Once you qualify for this loan, you have the flexibility of consolidating up to 4 loans into a single repayment loan with a tenure of up to 7 years. You’ll receive interest rates as low as 3.99% per annum. This loan doesn’t require any collateral or guarantor.

Click here for more information and document requirements about this product

Related: 10 Signs You’re Bad with Money, and Simple Solutions to Fix the Problems

Standard Chartered CashOne Debt Consolidation Loan

Image source: Standard Chartered Bank Malaysia

To sign up for this loan, you must be Malaysian or a Permanent Resident in Malaysia with a minimum income of RM36,000 a year.

And what will you get in return? You can consolidate up to 5 unsecured outstanding loans from other banks and choose a repayment tenure anywhere between 12 to 84 months. The flat rate of interest for this product is 0.583% and you can receive a maximum limit of RM250,000.

Click here for more information and document requirements about this product

Related: 5 Smart Things to Do if You’re Falling Behind on Credit Card Bills

Financial discipline is the key

A debt consolidation loan is a financial responsibility. Just because all your debts have been accumulated into a single account, it doesn’t mean your responsibility to clear this loan has reduced. It’s vital to know that this loan isn’t getting you out of debt; it’s simply lowering the burden to make your payments more manageable and affordable.

A debt consolidation loan isn’t for everyone, especially for those with erratic financial behaviours. So financial discipline is a must. Identifying what led to your debt situation in the first place (excess shopping? spending beyond means?) and working on them to cut down wasteful expenses and looking for ways to increase your income will be helpful.

And if you’re finding it difficult to get rid of your debt situation on your own, consider getting help from a debt counsellor or reach out to AKPK. Here are 5 Free AKPK Financial Education and Debt Management Programmes that you can check out.

It’s advised to only take on this type of loan when you’re aware of the risks as well as the benefits that come along with it. Because, at the end of the day you want to minimise your debt, not increase it.

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