When you default on paying your credit card bill or a monthly repayment of your loan on or before the due date, the interest accumulates, making it harder for you to pay your debt. There are 2 ways to clear your debt at a lower cost:
What are Debt Consolidation Loans?
With a debt consolidation loan, you can consolidate smaller loans into a single loan. In such a case, your total loan repayment cost will be lower than what you are currently paying in form of interests for several individual loans put together.
Debt consolidation loans are personal loans offered by banks in Singapore to help you repay your debts at a lower interest rate. Take a look at a few factors you need to consider before opting for a debt consolidation loan:
- Loan tenure: Your interest rate will vary depending on the tenure you opt for. The interest rate will be lower for a longer tenure in comparison to a shorter tenure.
- Interest rate: Depending on the type of loan you opt for (home equity loans or personal loans), your interest rate will either be variable or fixed.
- Fees: Some banks charge a processing fee for a debt consolidation loan.
- Credit score: Your credit score will improve if you opt for a combination of credit card and loan payments instead of using just multiple credit cards for your making your payments.
- Collateral: You will need to put your asset or assets as collateral (if needed) to convert your unsecured loans into secured loans.
What is Balance Transfer?
With a balance transfer option, you can transfer all your outstanding credit card debts from other accounts to a single account at lower interest rates. Most balance transfer plans offer 0% interest rate for an initial period of 3 months to 1 year. Listed below are a few features of a balance transfer plan:
- Credit limit: The credit limit of a balance transfer plan depends on the credit card or credit line account that it is tied to.
- Interest-free period: Most balance transfer plans in Singapore come with a 0% interest rate for a period of 3 months to 1 year.
- Processing fees: Banks charge a processing fee of 1-5% for balance transfer credit cards based on the transfer amount and tenure.
- Minimum monthly payment: Your monthly minimum payment will be 1% to 3% of your outstanding balance amount.
- Late payment fees: If you default on making your minimum monthly payment, you will be charged a late payment fee of S$60 to S$125 as it varies with each bank.
Tips to Use a Balance Transfer Plan to Clear Your Credit Card Debt
- A balance transfer plan (BTP) can either be in the form of a credit card or a credit line account. It is advisable not to use BTP for anything other than paying off your personal loan or credit card debt.
- Make it a point to pay off your debt within the interest-free period or else you will end up paying a higher interest rate.
- Ensure you pay the minimum monthly amount which is 1-3% of the balance transfer amount within the due date. You will be charged a late payment fee if you fail to make the minimum payment.
Tips to Use a Debt Consolidation Loan to Clear Your Debt
- Compare the interest rates and tenure options of debt consolidation loans offered by various banks before choosing the one that suits you.
- Transfer the highest interest loans to the debt consolidation loan so that you don’t have to pay more on interests.
- Set up automatic payments for your loan repayments on or before the due date so that you never have to pay late payment fees.
Debt Consolidation Loan Versus Balance Transfer
|Debt consolidation loan
||Balance transfer plan
|You can consolidate several loans such as home equity loans and personal loans into one single loan with a lower interest rate.
||You can transfer the outstanding balance from one or more high interest rate credit cards to a single lower interest card.
|Some banks charge an origination fee for a personal consolidation loan.
||You will be charged a one-time processing fee for a balance transfer.
|If you don’t have a good track record of making minimum monthly payments, then opt for a consolidation loan. The repayment process becomes easier with a single loan.
||You will be charged a late payment fee for defaulting on minimum monthly payments. The interest-free period will be rendered useless in such a scenario.
|Debt consolidation loans come with a fixed interest rate.
||Balance transfers come with promotional interest rates for a period of 3 months to 1 year, and will increase after the interest-free period.
Balance transfers and debt consolidation loans are tools that can help you manage your debts at a lower cost. It is up to you, the cardholder or borrower as to how you repay all of your debts by making well-informed decisions and taking the relevant steps at the right time.