Debts are a fact of life. Many people, from multimillionaires to corporate employees, have it. Financially healthy people even have debts, especially if they’ve bought big-ticket purchases, such as a real estate property or a car.
As a financially responsible individual, you know too well that handling your debts properly will reward you with a good credit score. However, some people find it hard to cope with debts mainly because their salary and repaying power are not proportional to the credit that they have borrowed and used. Some may be attending to other important financial obligations.
Nevertheless, there is one possible solution that may make repayments much easier and more efficient. Enter debt consolidation.
What is debt consolidation?
Debt consolidation is a method of simplifying your debts, which is done by bringing multiple debts together and turning them into one payment. This can be carried out in two ways. The first is through debt consolidation loan. The second is through the transfer of existing credit card debt to another credit card.
Think of it this way: imagine putting Debt #1, Debt #2, and Debt #3 in one box. That single box will then turn the three debts into a single loan. The said box will issue an invoice that states a fixed amount that you need to pay every month. When you pay that fixed amount monthly, you are actually paying for the three debts you’ve put inside that box until the agreed term ends.
When is debt consolidation a good idea?
You can view debt consolidation through two lenses, both of which are obvious advantages. First, you can treat it as a practical way of dealing with high interest rates on your debts. Second, you can use it as a means of organizing debts that are still manageable.
1. When you need to deal with high interest rates
Debt consolidation is a sound idea if your debts, such as credit card bills, have high interest rates. When you take out a new loan to pay all your debts at once, that new loan may have a lower interest rate. Moreover, the payment schemes are actually manageable, albeit much longer.
2. When you want to organize your debts
It is also a wise strategy if you want to organize a manageable size of debt. Multiple debts usually have different due dates, making monthly payments a hassle. But when you consolidate all your debts into one payment, you will only have one due date to remember. This will make it much easier for you to set aside repayment money and automate your monthly payments.
Read more: How to Pay Debt Despite Having Low Income
When is debt consolidation a not-so-good move?
It is important to know that debt consolidation has its pros and cons. However, the drawbacks are not usually given the spotlight. But for all intents and purposes, this article will show you the possible pitfalls when you go for this method.
1. It will not free you from debts
For one, a debt consolidation becomes a disadvantage when you think that it will magically deal with all your existing debts. Because your debts are rolled into a single payment, you may start feeling free of debt. And that dangerous thinking may lead you into getting another debt.
2. You still have to pay fees
Debt consolidation loans usually come with fees. When you move the outstanding debt of your credit card to another credit card, you may have to pay balance transfer fees. You may also need to cover other related expenses, such as annual fees and closing costs.
Also, there is no guarantee that a debt consolidation loan, which is technically a new loan, will have lower interest rates. It will still depend on your lender and your credit score. Your monthly payments may even have a higher interest rate.
If you choose to pay less every month, the term of your debt consolidation loan will likely be extended. That also means extending the period of your interest payment. In the long run, you may end up paying more interest.
Does debt consolidation hurt your credit score?
It still depends. But if you are diligent payer, you may be able to improve your credit score. Having just one due date to remember will make it easy for you to set aside money or automate payments, thus helping you to always pay on time. And paying on time is one way to boost your credit.
However, consolidating your debts also has some risks and can potentially hurt your credit. Take this one situation, for instance: if you transfer the debts of your three other credit cards to a new credit card, that new credit card’s limit may be maxed out. For creditors, this is a red flag, and this may result in your credit score being lowered.
Who offers debt consolidation loans in the Philippines?
Again, there are two ways to consolidate your debts: one is through debt consolidation loan and the other is through the transfer of your credit card debt into another credit card. The second method may be pretty straightforward to understand while the first method may raise a couple of questions, as debt consolidation loan may sound foreign and technical to many.
However, a debt consolidation loan is basically a personal loan. A lot of leading banks in the Philippines offer this. But understand that not all banks offer personal loans that can be used for debt consolidation.
BDO Personal Loan
Large banks, such as Banco De Oro (BDO) offer debt consolidation through personal loans, with a minimum loan amount of PHP 10,000 up to PHP 1,000.000.The loan term may range from 6 months to 36 months while the effective annual interest rate ranges from 25.98% to 26.27%.
Citi Personal Loan
Citibank also offers loans ideal for debt consolidation. With Citi, you can apply for a personal loan amounting up to PHP 2,000,000. The loan is payable up to five years, and there is no collateral needed. Their annual contractual rate or their interest based on a 360-day period is 26.9% (as of December 2015). There are also charges for disbursement and closing.
The two loans from two leading banks above are just detailed here to give you a picture of what debt consolidation loan may look like. It is also worth paying your trusted bank or lender a visit to know if their personal loan can be used for debt consolidation.
Just remember, though, that different institutions may have different debt consolidation qualifications.
If you’re looking to manage your debts, debt consolidation may be the best way to go. However, you have to think things through first, especially if this is your first time using this debt management strategy.
First, if your debts are still manageable, try to find other ways to deal with them, such as selling items that you don’t need anymore or adding another income stream, such as a part-time job. Second, if you decide that this is the best way, find out if you can actually avail lower interest rates and calculate the fees involved that come with the new loan. Ultimately, stick to new habits that will help you put your debt under control.
Source:  Debt Consolidation (Kagan, Investopedia, 2020)
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