Debunking the most common myths about debt consolidation loans

Debt consolidation is a great way to make paying off your debt more manageable. Debt consolidation is a financial strategy most commonly used by many to take control of credit card debt and involves combining your loans to pay off all of your debt with a single monthly payment, rather than paying multiple minimum monthly payments over a series of bills .

However, not every bill can be combined under the debt consolidation plan. Debt consolidation plans apply to unsecured loans, so exclude secured loans such as auto or home loans. Debt consolidation also excludes home improvement loans, educational loans, medical loans, credit facilities made for business or business purposes, and/or outstanding debts in joint accounts.

It is good? Is it bad? And most importantly, is it for you? Before we answer these questions, we must first address the common misconceptions surrounding debt consolidation. Read on to help us debunk some of the myths about debt consolidation.

Myth 1: Debt consolidation means lower interest rates

It’s a common misconception that debt consolidation offers lower interest rates and saves you more money on interest.

Truth: The fact of the matter is that you simply take out a larger loan to pay off several smaller debts.

Although most people assume that paying off a single loan with a fixed interest rate will result in lower overall interest than multiple debts with their own individual interest rates, this depends on the interest rate differential between your original loan and your debt consolidation plan.

Most lenders would look at your creditworthiness before setting an appropriate interest rate for you. If your credit score is higher, you are more likely to get a better interest rate. Otherwise, you may face higher interest rates.

Myth 2: Debt consolidation leads to more debt

One of the most dangerous pitfalls of debt consolidation is increasing your overall debt. This can happen when you use a debt consolidation loan to pay off your credit cards and then take additional payments from your credit cards.

Truth: Unfortunately, only you can debunk this myth with a solid financial plan and proper expense budgeting.

However, if you are able to avoid the above, debt consolidation will not lead you into deeper debt. Finally, debt consolidation is a debt management strategy that aims to do the exact opposite by helping struggling debtors break a pattern of defaults and high late payment penalties.

With debt consolidation, you don’t have to deal with multiple creditors and are therefore less likely to miss or forget a payment deadline. You only have to make a single payment on your debt each month.

Guy looking at credit_score

Myth 3: Debt consolidation will ruin your credit score

Taking out a debt consolidation loan may cause your credit score to drop due to the tough loan request, but this is only temporary.

Truth: In the long run, debt consolidation could even increase your credit score as you reduce the amount of money you owe and make payments on time.

Paying off revolving lines of credit, such as credit cards, can decrease the credit utilization rate reported on your credit report. Consistently making payments on time — and ultimately paying back the loan — can also improve your score over time.

If you didn’t previously have an installment loan on your credit report, after receiving the debt consolidation loan, your credit mix will improve, increasing your credit score.

value versus price

Debt Consolidation VS Refinancing

Before taking out a debt consolidation loan or any other form of credit, it is always advisable and advisable to explore other alternatives and options to see what best suits your needs.

If you are unfamiliar with the concept of refinancing, check out our analysis here to learn the pros, cons and everything you need to know about refinancing.

Should you consolidate or refinance your debt? To decide between debt consolidation and refinancing, you must first understand what each option entails and the fundamental differences between the two.

Debt consolidation is used to pay off multiple debts with a lower-interest loan. This way you only have one regular monthly payment with a fixed term instead of several different payments over an indefinite period of time.

In contrast, a refinance usually means negotiating new terms for existing debt, whether it’s a lower interest rate or a different payment schedule. Transferring a credit card balance to another card with an introductory annual percentage rate (APR) of 0% is one way to refinance credit card debt.

In which situation would it make more sense to take out a debt restructuring loan or refinance?

If you have high-interest or variable-rate debt, especially if it’s on multiple credit cards, it makes more sense to take out a debt consolidation loan so you can pay off your debt faster and potentially reduce the amount you pay in interest. However, if your debt burden is less, it may make more sense to refinance instead.

Aside from debt consolidation loans and refinancing, there are other options to consider. To name a few, personal loans and personal lines of credit are some alternatives worth exploring. For a more detailed comparison, see our in-depth analysis here.

Best Debt Consolidation Loans in Singapore

For those interested in a debt consolidation loan, we have reviewed all the debt consolidation loans on the market and have compiled the best debt consolidation loans that we believe will best suit your needs. Below are some options:

HSBC Debt Consolidation Plan

PROMO: Get rewarded with S$300 cashback on loan approval for a new HSBC debt consolidation

Financial support:
  • Existing Debt Consolidation Plan holders receive 5% cashback upon approval of refinancing their Debt Consolidation Plan with HSBC.

The HSBC Debt Consolidation Loan is the best deal on the market for borrowers looking for extensive or long-term debt consolidation plans. Because HSBC charges a low interest rate (from 3.4% pa) and at the same time waives the processing fee. For example, for loan terms of 1-10 years, only a flat rate of 3.4% is charged, which is cheaper than the average rate.

PROMO: Get rewarded with S$300 cashback on loan approval for a new HSBC debt consolidation

Financial support:
  • Existing Debt Consolidation Plan holders receive 5% cashback upon approval of refinancing their Debt Consolidation Plan with HSBC.

The HSBC Debt Consolidation Loan is the best deal on the market for borrowers looking for extensive or long-term debt consolidation plans. Because HSBC charges a low interest rate (from 3.4% pa) and at the same time waives the processing fee. For example, for loan terms of 1-10 years, only a flat rate of 3.4% is charged, which is cheaper than the average rate.

Maybank Debt Consolidation Plan

PROMO: Prices from 3.88% pa

Financial support:
  • Funding interest from 3.88% pa (6.92% EIR)
  • 5% cash rebate upon credit approval (refinance only)
  • New/first DCP customers can receive S$1,500 cashback

The Maybank Debt Consolidation Loan is worth considering for its cheap interest rate and cashback promotion. The bank is currently offering promotional interest rates of just 3.88% pa Maybank is also offering a 5% cashback promotion for new DCP customers. So if you prefer a cashback promotion, Maybank is a good choice.

PROMO: Prices from 3.88% pa

Financial support:
  • Funding interest from 3.88% pa (6.92% EIR)
  • 5% cash rebate upon credit approval (refinance only)
  • New/first DCP customers can receive S$1,500 cashback

The Maybank Debt Consolidation Loan is worth considering for its cheap interest rate and cashback promotion. The bank is currently offering promotional interest rates of just 3.88% pa Maybank is also offering a 5% cashback promotion for new DCP customers. So if you prefer a cashback promotion, Maybank is a good choice.

CIMB Bank Debt Consolidation Plan

CIMB Debt Consolidation Plan
CIMB Debt Consolidation Plan
Consider this if
You cannot get another debt consolidation loan
  • Balance-to-Income Ratio
    • More than 12x monthly income
  • Early Redemption Fee
    • 3% of the outstanding principal or $250, whichever is greater

CIMB’s debt consolidation plan comes with the lowest advertised flat rate of 2.77%. However, there is a one-time processing fee of 1%, making it a little less competitive than other debt consolidation plans. In addition, you should note that CIMB’s interest rate is not guaranteed for all borrowers. CIMB’s precise language is “Interest rates are as low as 2.77%” and your approved rate may be significantly higher than the published rate depending on your credit history.

CIMB Debt Consolidation Plan
CIMB Debt Consolidation Plan
Consider this if
You cannot get another debt consolidation loan
  • Balance-to-Income Ratio
    • More than 12x monthly income
  • Early Redemption Fee
    • 3% of the outstanding principal or $250, whichever is greater

CIMB’s debt consolidation plan comes with the lowest advertised flat rate of 2.77%. However, there is a one-time processing fee of 1%, making it a little less competitive than other debt consolidation plans. In addition, you should note that CIMB’s interest rate is not guaranteed for all borrowers. CIMB’s precise language is “interest rates are as low as 2.77%” and your approved rate may be significantly higher than the published rate depending on your credit history.

Conclusion

It’s usually not worth consolidating debt if you can’t get a lower interest rate than you already have. However, if you’re snagging multiple outstanding bills because you’re unable to keep track of all your bills and pay them on time, you should definitely consider taking out a debt consolidation loan.

However, debt consolidation could prove counterproductive if you don’t have a plan to pay off that debt. You must continue to be careful with your budget and make your payments on time and in full.

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