Debt consolidation is indeed an effective way to save time and effort that goes into making multiple payments by discharging the liability with a single scheduled payment. But taking appropriate measures to mitigate the risk a debt consolidation plan brings is a far better option than going without proper analysis.

A debt consolidation plan is a smart method to reduce your monthly interest costs, repayments costs and the time it takes in paying multiple loan interests. You must note that it’s not always a risk-free process.

Therefore, it is highly important for a borrower to make sure he/she understands the risks involved in a debt consolidation plan so that the situation doesn’t get worse. If you are not careful with your choice, you may end up with more debt than you start with. While there are so many benefits of a debt consolidation plan as to how fast and quickly this plan helps the borrower reduce their debt burden, it’s equally important to check whether it is appropriate for a particular debtor or not.

LoanBuddy Identifies the dangers involved in debt consolidation, keep reading the article to find out what they are and how you can control them.

1.Burdening yourself with more debt

One of the biggest dangers that lie in a debt consolidation plan is that it’s after all a loan only and you are applying for another loan without solving your spending habits for the existing loans. Simply, you are burdening yourself with a loan that is designed to come out of multiple secured loans that caused you problems in the first place.

If you obtain a personal loan or avail of a balance transfer card facility to repay the existing debt, you will then be having more debts. You will have a lot of credit money on the cards you transferred the balances from with this facility. If you take out a debt consolidation loan for turning around and start converting those credit cards, they could have more balances once again. And, you will also have another loan to address.

This can cause you serious financial distress if not managed properly. You are advised to not obtain any debt consolidation loan unless you have a proper budget to avoid extra spending every month. This isn’t going to work if you keep spending more and owe more. Instead, prepare a budget for your monthly earnings and expenses, and start saving towards an emergency fund in the worst scenarios.

2.Paying more interest as compared to the old debts

A debt consolidation loan gives you the benefit of a lower interest rate and this is mostly the reason why people in Singapore prefer this when they find themselves surrounded by multiple debts of higher rates of interest. But did you know that lower interest is not the only factor that determines your actual payout of interest?

The loan tenure also plays an important role in the interest cost you will pay over the loan period. If you obtain a debt consolidation plan that has lower monthly repayments by making the loan tenure long, your interest rate will likely get affected. How? The printed interest rate may be lower but the overall cost will be higher which ultimately makes your overall interest rate higher than what is applied to the principal amount of the loan.

Suppose, you had a credit card loan worth $2,000 at 15% interest and another credit card worth $3,000 at a 20% interest rate. You were paying $200 per month in installments to each of the cards. This way, you would be paying off your debt in 25 months I.e. roughly in 2 years, and a total interest amount of $ 629. However, you took a debt consolidation for 36 months at 9.24% to suspend all other existing loans. Your monthly payments would reduce from $400 ($200 each in old debts) to $159.56.

Isn’t it great right? You should see the problem here, even if you are at a lower interest now, your overall cost of interest will be higher because of installment frequency. You would pay over 36 months rather than 25 months. In total, you will pay a total interest of $744 which is in fact, $115 more than your old interest payments.

How can you avoid this extra cost? Simply, you should continue making repayments in the same monthly plan or even higher amount installments on the new debt consolidation loan. For this, you must make sure there’s any prepayment penalty existing on the consolidation plan.

3.Risking the collateral for debt

When you get your debt consolidation loan shielded with security (collateral), there is always the risk of losing the collateral you gave for consolidating the debt. In the event of default, the lender will possess your assets secured under the loan. The collateral could be any of your valuable assets such as your home, car, jewelry, or any other belonging. Be mindful before you give any collateral for the consolidation.

4.Getting trapped in lenders’ debt consolidation scams

Some banks and financial institutions advertise debt consolidation schemes to borrowers who are struggling with their finances. Many of these lenders unfortunately are very unfriendly to their borrowers. They may set their own terms and conditions for consolidation plans such as higher interest rates, longer loan terms, and any other condition which is unfavorable to the consumer. They may charge hefty penalties for a single missed payment.

You definitely don’t want to end up with such debt consolidation scams, hence research loans and the lenders as well carefully before taking any decision. Don’t decide anything in haste. Compare various interest rates, and total loan costs involved, and also read the reviews about the lender. If you don’t think you can carry out this research on your own, talk with a loan consultant. LoanBuddy conducts a comparison between different loan options in terms of interest rates, loan terms, and repayment amounts. Connect with us to understand how a debt consolidation application works in Singapore.

5.Consolidation may not fix your bad financial habits

This is also one of the drawbacks of a debt consolidation plan. Debt consolidation indeed makes your day-to-day financial budgeting and control easier by freeing up cash and accelerating debt repayment. However, that is only possible when your debt is static and doesn’t change.

Some people have debt piled up because of their unhealthy spending habits. Debt consolidation in such a situation is a short-term solution and won’t help in the longer run. In fact, it may make your situation worse if you keep spending money on unnecessary purchases even after consolidating your debt.

Look at it this way, your income portion is not increasing but your spending is fluctuating. Debt consolidation is not a good idea if you don’t change your spending habits.

Therefore, you must not forget the reason which made you buy a lot of debt in the first place. Debt consolidation is just another type of loan which won’t help you in changing your financial habits but just works as a bandage for a shorter period.

6.Your future options may be limited

Obtaining a credit card loan and merging it into a consolidation loan along with other unsecured loans is definitely an advantageous move. When you run on the debt consolidation plan, you risk losing out on certain options and loan programs. Some lenders ask you to stick to their debt consolidation plan for a certain period or until a certain portion of the loan is repaid. This practice restricts you from exploring options that might be more beneficial to you.

Click here to read Pros and Cons of Debt Consolidation

Summary

Debt consolidation is not a quick fix for your financial setbacks. There is a lot of effort involved in making an application for this type of loan in Singapore. Even if you become successful in obtaining one, it’s a guarantee that you will be released from your debt tension. You need to be careful enough before going forward with a DCP (Debt Consolidation Plan) in Singapore. By considering the risks involved in a debt consolidation scheme, you can make a proper decision based on your deep research and analysis.

However, if you find yourself struggling with a debt consolidation loan application as to whether or not it will get approved, connect with us. We offer a free assessment of your loan application and advise you of any improvements you need to make to avoid rejection from banks and financial institutions. 

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