Ever heard of the proverbial rob Peter to pay Paul? While this phrase is often used in a negative light, the same concept can be applied successfully through debt consolidation loans from private moneylenders. This is a financial arrangement where you roll your liabilities into one bundle of debt, then borrow one monthly installment loan with interest to pay it off. As straightforward as it sounds, many borrowers often make a few wrong turns when seeking and implementing debt consolidation. So, what are these mistakes, and how can you avoid them?
1. Not thinking it through
We can only imagine how exhilarating it is to owe no one anything. In fact, the mere thought of having all your loans rolled into one bundle is enough to make you stop reading this blog post and apply for a debt consolidation loan without a thought. I mean, who wouldn’t want to dodge the stress of handling auto loans, student loans, and credit card bills separately? But, not too fast! What most people don’t understand is that this type of short term loan in Singapore isn’t for everyone. Here are a group of borrowers that should avoid debt consolidation:
- Those with a poor credit score. Having a low credit rating makes it impossible to acquire a low-interest short term loan in Singapore.
- Borrowers who owe low-interest loans. The thing is, debt consolidation is only feasible if they present a cheaper alternative. But if you’re in the red for a few cheap personal loans from private moneylenders, refrain from consolidating your debts.
- Those with a bountiful cash flow to cover huge debt obligations without missing payments.
2. Acquiring the new loan at a high-interest rate
By now, you’re probably aware that debt consolidation involves borrowing a new loan from private money lenders to offset your liabilities. However, you need to be careful not to rack on additional financial obligations in the form of interest rates. Depending on your credit score, the interest rate for such a monthly installment loan in Singapore can range from 5% to 30%.
Most people get so carried away with the idea of debt consolidation that they disregard the importance of these rates. A high-interest rate would automatically cancel out the whole essence of consolidating your debts in the first place.
3. Turning a blind eye on your spending
Whether you admit it or not, the stark reality is that overspending is the root cause of debt. With that said, taking a debt consolidation loan will make zero financial sense if you fail to deal with the real problem. The most important step towards being debt-free, therefore, is to seal cracks through which your money is falling. Is it your car? Sell off one, or opt for public transport if it’s cheaper. Your house is too big? Rent out a room or two and earn extra cash through rent. Whatever it is, prioritize a realistic budget that helps you decode this financial problem. A good budget should adhere to the 50/30/20 cardinal rule. This rule states that 50% of your total income should cover essentials, 20% savings, and 30% any other bill that remains, which is where debts fall.
4. Rushing over the fine print
With debt consolidation, not paying attention to details will cost you a great deal. Before putting your signature on any dotted line, make sure you understand the details of the contract. For instance, missing a payment with credit card balance transfers might strip you of your introductory interest rate, an incentive offered by new credit facilities.
Also reading through your contract will help you spot inconsistencies that might point towards the integrity, or the lack of it, of a lending company.
5. Opting for a longer repayment tenure
While a low-interest monthly installment loan sounds great, ignoring loan tenure will have you coming full circle to the same spot. If you’re familiar with how interest works, you should know that you can still end up paying a lot of interest even if the rate declines while consolidating. This happens if you choose an extensive life for your loan by making small payments.
The best way to jump over this issue is to make arrangements for a shorter tenure by exceeding the minimum payment for your installment. For instance, if your debt consolidation loan with interest requires you to pay $1000 per month, budget for $120 instead. You might feel the short-term pinch, but you’ll save a lot of money by preventing interest from accumulating.