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Consolidation Debt : 

What is it and How Does it Help? 

· Personal Finance,Cost Saving Tips

Paying off a debt is never a pleasurable experience. When you combine numerous loans, you've got a problem on your hands. But don't be concerned! A Debt Consolidation Loan is one guaranteed approach to offer you the upper hand when it comes to managing your loan payments. 

A debt consolidation loan, as the name implies, combines all of your loan payments into a single payment. A debt consolidation loan, like refinancing, allows you to take a step back and re-evaluate your financial obligations. Consider it a new beginning for your monthly loan payments. It may also be used to pay off credit card bills.

A lower interest rate is one of the most significant advantages of debt consolidation. We all know that when we go into debt, it's usually because of exorbitant interest rates or taking on too much debt without considering future financial obligations. A debt consolidation loan typically combines many large loans or debts into a single loan with a longer repayment period. As a result, interest rates are lower. The trick, then, is to find the lowest interest rate possible.

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Is it applicable for me?

Before we look at how a debt consolidation loan can help you, let's have a look at some of the factors that should make you reconsider taking one out. Taking out another loan if you have a history of debt and are continuously in financial problems is never a wise idea.

Debt consolidation also implies that you are having difficulty repaying debts that have been assigned to you. Additional debt was generated when you borrowed money and assumed you could pay it back, so you took out more loans. Consolidating your debts now appears to be a simple solution. If you take one on, you can end up with a negative credit score in some situations.

However, if this is your first time conducting debt consolidation and you have good reasons to do so, there should be few negative consequences. Now that you're aware of the risks, you might be wondering how debt consolidation loans might help you.

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How does it work?

We need to know how to employ this form of loan in any given case, just like any other financial instrument. To accomplish so, we must first comprehend how a debt consolidation loan operates. Simply said, if you have a pair of interest-bearing debts, a debt consolidation loan will pay off those loans.

Let us do some quick math in this.

  • Credit card loan: RM20,000 Principle amount + 17% Interest
  • Personal Loan: RM50,000 Principle amount + 15% Interest

Individually, you would be paying RM3,400 total interest for your credit card loan and RM7,500 for your personal loan. That totals up to RM10,900.

Alternatively, you can take a debt consolidation loan with a lower interest rate such as the following that combines the principle amounts of both the debts.

  • Debt consolidation loan: RM70,000 Principle amount + 14% Interest

 You would pay a total of RM9,800 interest. That’s a saving of RM1,100. This runs on the assumption that none of your instalments are paid at the time of consolidation.

 We picked this figure as an example since it is confidential. The interest rates on most personal loans and credit cards are substantially higher, and most banks have customised their debt consolidation loans to be much lower than the initial interest rates.

 Take a look at this video to see how it works.