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Unmanageable to Paid – Financial turnaround with a debt consolidation loan in Singapore

The word ‘loan’ is loaded with negativity and many of us automatically associate it with poor finances. In truth, loans can be your best financial friend if they are understood and used properly.

If you are struggling with unmanageable debt, your best option may be to apply for a debt consolidation loan in Singapore.

What is debt consolidation?

To consolidate means to merge, and debt consolidation merges numerous loans into one.

The average person owes money on a home loan, car loan, credit cards, and possibly other personal or business loans. While the total amount due every month is generally unchanged for home and vehicle loans, credit card bills and other similar expenses fluctuate.

The monthly instalment owed to each creditor may be due by a different date of the month. If a borrower misses a payment for any of these debts, they may be charged additional penalties aside from the amount due. Different debtors charge different rates of interest on the amount due, too.

All these shifting factors can combine to create confusion in any budget. Unfortunately, the consequences of that confusion often include even more missed payments and late fees. The borrower wants to service his or her debt, but it is simply too difficult to keep up amid family and work obligations.

This is where a debt consolidation loan comes in.

How does a debt consolidation loan in Singapore work?

A good debt consolidation lender works to help you pay off your debts in an orderly, systematic way. The loan approval process begins with an assessment of your current finances, including income, debt, credit rating, and employment.

This process gives the lender a clear idea of your debt to income (DTI) ratio, which is a good indication of how likely you are to repay your debts. If they agree to extend you a consolidation loan, the lender contacts each of your current creditors and pays off the entire amount that you owe them.

The total amount that they pay off, together with associated fees and charges, becomes the new amount you owe. So, while the total debt in your name does not decrease, it is now owed to a single creditor. That means a single loan principal, a single rate of interest, a single instalment due date, and all governed by the same rules and subject to identical penalties.

Most borrowers find that this streamlining gives them a chance to seize control of their finances and better manage their budgets.

Does debt consolidation improve credit rating?

Your credit rating is usually the most important factor a lender considers before approving any credit. While individuals with an Excellent or Good rating get approval for all reasonable loan requests, it can be difficult for others.

A debt consolidation loan in Singapore appears on your credit report and is a good indication of your commitment to honouring your debts. It shows a lender considering your application that you are more likely to take decisive action than default on a loan.

This is true for new lenders as well as those from whom a previous loan was consolidated.

However, consolidating your loans does not necessarily improve your credit rating, especially immediately. While the exact formula used is not publicly available, one of the positive factors is debt variety.

A borrower who has a car loan, several credit cards, and an overdraft account will rate higher than someone who has just a car loan and one credit card. This is because a credit score also assesses the borrower’s ability to juggle various commitments.

On the other hand, it is much better to consolidate several loans if you are struggling to manage payments. A series of late and missed payments will often cancel out all the advantages of a diverse debt portfolio.

Over time, a strong track record of responsible financial decisions will boost your credit score. This will open the door to larger loan principals and possibly lower interest rates as well.

Remember to only deal only with legal money lenders in Singapore. Unlicensed lenders are not part of the credit scoring system and paying back a loan to them does not improve your rating.

Now that you understand how a debt consolidation loan in Singapore helps you save your money, you have what you need to turn your finances around.

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