Debt Consolidation

A debt consolidation loan is a type of loan that you take to consolidate or combine different loans. For instance, if you owe RM8,500 and RM6,500 on two credit cards, plus another personal loan of RM10,000, you can simplify these three separate debts by consolidating and paying for all of them in one RM25,000 loan. Debt consolidation can be a good choice if you have multiple outstanding credit cards or personal loans. You can choose longer loan tenure to bring down the monthly loan payment to a manageable level, commensurate with your financial capability and comfort.

Benefits of debt consolidation

1. Lowers Your Debt Service Ratio
   First, you’ll need to own a property. There should be a gap between the market value of the property and the outstanding housing loan, as we’ll be using the gap to absorb all the other loans.
   For example, a property is valued at RM500,000 with an outstanding loan of RM300,000. With a 90% mortgage loan of RM450,000 and after deducting the outstanding loan of RM300,000, that’s RM150,000 left for you to settle your other debts.RM500,000 – 90% loan = RM450,000RM450,000 – RM300,000 (outstanding loan) = RM150,000How is this any different from refinancing your property and cashing out the additional amount to settle your debt? It seems similar, but it’s not!When you apply for a refinancing loan with the cash-out option, all your existing credit cards, hire purchases, and personal loan commitments will be considered in the calculation of your Debt Service Ratio (DSR).The difference when it comes to debt consolidation is that the banks will not calculate existing loans that are going to be consolidated. Instead, it has already been factored into the loan amount that you’re applying for. Here’s a table to help explain the differences better:

   INITIAL LOAN	OUTSTANDING LOAN AMOUNT	AFTER REFINANCE	AFTER DEBT CONSOLIDATION
   Property Loan (RM350,000)	RM300,000	RM1,400	RM1,400
   New Cash Out	RM150,000	RM700	RM700
   Credit Card	RM50,000	RM2,500	–
   Personal Loan (RM70,000)	RM50,000	RM1,400	–
   Hire Purchase (RM70,000)	RM50,000	RM800	–
   Total Monthly Commitment:		RM6,800	RM2,300

2. Interest-Savings
   Since we all know that housing loans are at an all-time low, it’s the most opportune time to use these low interests to soak up higher interest ones, like credit card and personal loans. Currently, the interest rate of housing loans is between 3-5%, whereas credit card and personal loans are multiple times higher than that.For what it’s worth, credit cards that have been settled by the bank don’t need to be cancelled. You can still keep the card even after the bank has released the sum to settle the balance! On the other hand, for personal loans and hire purchases, the account will be closed once the full settlement has been made.In a nutshell, consolidating your debt means taking on a new loan to pay off your existing loans. It sounds crazy, but it’s well worth it if you manage your expenses and plan your finances well. Not only will your commitments be reduced greatly and encourage more interest savings, but it’ll improve your credit score as you won’t have too much burden on unsecured loans.
3. Reduces Your Monthly Commitment
   Instead of paying multiple loans every month, debt consolidation makes it easier for you to pay everything in one loan account, and reduce the overall commitment at the same time.Here’s how the decision of consolidating debt can be money-saving:

   OLD LOAN AMOUNT	BEFORE DEBT CONSOLIDATION (MONTHLY COMMITMENT)	NEW LOAN AMOUNT	AFTER DEBT CONSOLIDATION (MONTHLY COMMITMENT)
   Property Loan (RM350,000 with RM300,000 current outstanding balance)	RM1,600	New RM300,000 loan with lower interest rate	RM1,400
   Credit Card (RM50,000 current outstanding balance)	RM2,500	Debt consolidated into an additional loan of RM150,000	RM900
   Personal Loan (RM70,000 with RM50,000 current outstanding balance)	RM1,400		–
   Car Loan (RM70,000 with RM50,000 current outstanding balance)	RM800		–
   TOTAL OLD MONTHLY COMMITMENT:	RM6,300	TOTAL NEW MONTHLY COMMITMENT:	RM2,300

   Comparing the monthly amount to be paid for just one loan vs. many different loans, it’s a substantial drop in your monthly commitment.

STEP BY STEP TO APPLY FOR DEBT CONSOLIDATION LOAN