Debt can accumulate quickly, leaving many individuals feeling overwhelmed. However, there is a solution that can help you regain control of your finances — a personal loan for debt consolidation.
Opting to merge your debts into a single monthly payment can be a wise financial move, allowing you to simplify your finances and save money on interest payments.
In this article, we delve into the concept of employing a personal loan for debt consolidation in Malaysia, offering you valuable insights and advice to facilitate well-informed decisions.
What is Debt Consolidation?
Debt consolidation involves combining an individual’s existing debts, typically those burdened with high interest rates, into a single new loan or credit card.
The objective is to simplify your financial situation by reducing the complexity of managing various bills and due dates each month.
By consolidating these debts into a single, often more favourable, financial product, individuals can streamline their repayment process and potentially lower their overall interest costs.
What are the Benefits of a Personal Loan for Debt Consolidation?
1. Unlock Cash & Lower Debt
When considering debt consolidation, debtors often prioritise two key objectives.
Firstly, they aim to reduce their monthly financial burden by combining multiple debts into a single loan with a lower interest rate.
Secondly, they seek to gain some much-needed cash through the debt consolidation process.
For instance, if a debtor has an RM100,000 outstanding credit card debt and needs to pay RM5,000 monthly, they might opt for an RM200,000 personal loan with a lower 7% interest rate.
This allows them to clear their existing debt and provides the benefit of a wider range of instalment options, typically falling between RM2,800 to RM4,500 per month.
As a result, the debtor can access extra cash for immediate needs and enjoy the relief of reduced monthly instalment amounts, ultimately improving their financial stability.
2. Settle Debt Faster
Furthermore, choosing a personal loan for debt consolidation can lead to settling debts faster.
With the extra money saved from lower interest rates, borrowers can allocate more funds towards repaying the principal amount of the loan.
However, it’s essential to select a personal loan without a lock-in period, as it may incur an early settlement fee.
As such, you should opt for personal loans without settlement fees or those offering rebates for early settlement to accelerate your journey towards becoming debt-free.
3. Regular Payment Schedule
Another noteworthy advantage is the establishment of a regular payment schedule. By consolidating debts into a single personal loan, borrowers simplify their financial responsibilities.
This streamlined approach makes it easier to budget for the monthly payment and reduces the likelihood of late or missed payments, thereby preserving a positive credit history.
4. Improve Credit Score
Additionally, the consistent monthly repayments associated with personal loans can significantly improve one’s credit score.
This is because by adhering to the agreed-upon payment schedule, borrowers demonstrate their financial responsibility to creditors and credit bureaus.
Moreover, debt consolidation also reduces your debt utilisation ratio, which is another factor that positively impacts one’s creditworthiness.
When It’s Not a Good Idea to Consolidate Your Debts in Malaysia
While applying for a personal loan for debt consolidation in Malaysia can be an effective financial strategy, it may not always be the right choice in certain situations:
1. Unable to Afford Monthly Repayments
If your credit score is too low to qualify for a personal loan with lower interest rates, you may end up paying more in the long run.
However, there is hope, as once you have improved your credit score, you can reapply for a personal loan with more favourable terms.
In some cases, Bluebricks will assist clients in paying off their existing debts first to raise their credit score to a minimum of 640.
Consequently, when clients apply for a personal loan with improved credit scores, they are more likely to qualify for better loan terms.
2. Negligible Debts
Secondly, for individuals with relatively small debts that can be paid off within a few months, debt consolidation may not make financial sense.
The hard credit inquiry that comes with applying for a personal loan can temporarily lower one’s credit score, and the benefits of consolidation may not outweigh this drawback.
In such situations, alternative debt management strategies (like the debt snowball or debt avalanche) can be more effective in tackling debts more effectively.
3. Doesn’t Solve the Underlying Issue
Lastly, it’s important to recognise that debt consolidation doesn’t address the underlying financial issues that may have led to the debt in the first place.
While it may provide temporary relief, it doesn’t instil good financial habits or address spending problems. Instead, to achieve long-term financial stability, individuals can:
- Control their spending.
- Develop sound financial practices.
- Seek additional income sources to pay off their debts.
3 Tips for a Successful Debt Consolidation
Achieving a successful debt consolidation journey requires careful planning and discipline. Here are three essential tips to help you along the way:
1. Open Multiple Savings Accounts
Consider setting up multiple savings accounts or e-wallets designated for a specific purpose or expense category.
By allocating a specific amount of money to each account or wallet, you can create a clear and manageable monthly budget.
Once the funds in an account are exhausted, it serves as a visual cue that your budget for that category is spent, helping you exercise greater control over your spending.
2. Seek Advice & Support
Don’t go through the debt consolidation process alone. Share your financial concerns and goals with loved ones to gain their support and motivation.
Being open about your financial situation makes you more accountable for your actions. Additionally, you can consider joining support groups or seeking guidance from professional debt management services.
3. Avoid Using Credit Cards
Commit to spending within your means and resist the temptation to use credit cards for unnecessary expenses.
You can take proactive steps like locking away your credit cards, freezing them, or entrusting them to a trusted family member for safekeeping.
Most importantly, avoid closing your credit card accounts, as this may end up hurting your credit even more.
What is an Alternative to Personal Loans for Debt Consolidation in Malaysia?
While applying for a new personal loan to consolidate debt can be an effective strategy, it’s also essential to consider alternative approaches.
One alternative is refinancing with a new personal loan that offers a lower interest rate and an extended loan tenure.
By doing so, you can potentially reduce your monthly instalment payments, making it more manageable to pay off your debts.
Additionally, this approach might provide you with extra cash. The new loan could cover your existing debts while leaving you with funds to address other financial needs.
How Bluebricks Can Help with Personal Loans for Debt Consolidation in Malaysia
- Personal loan rejected services
- SME loan rejected services
- Mortgage loan rejected services (for buying a new home, refinancing and cashback purposes)
- Collateral loan services
Our solutions are tailored to help individuals and businesses achieve their financial aspirations while effectively managing their debts.
Comprehensive Personal Loan Consultancy Services
At Bluebricks, we take into account various factors to ensure you receive the financial assistance and the loan product that aligns with your overall situation.
- The specific loan amount you require.
- The urgency with which the loan amount is needed.
- Whether you or your parents own a property that has been held for over ten years.
- Your income level.
- Your CTOS score (such as your credit score and credit history).
Personal Loan for Debt Consolidation – FAQs
In this FAQ guide, we address some common questions and concerns surrounding personal loans for debt consolidation in Malaysia.
Whether you’re considering this option or simply seeking clarity, we’re here to provide answers to help.
There are several potential reasons why you may be unable to secure a loan for debt consolidation. Some of the most common factors include:
· Too Many Applications within 12 months:
If you have more than two loan applications, it will be recorded in your CTOS report.
This can lead to rejection by many banks, as they tend to avoid clients who appear to be seeking loans excessively, as it poses a higher risk for the banks.
· Poor Credit History:
Banks and lenders may perceive you as a high-risk borrower if you have a history of late payments, which can result in your application being declined.
· High Debt-Service-Ratio (DSR):
Banks and lenders might be concerned that you are already heavily burdened with existing debt and are unable to take on additional financial obligations.
· Excessive Loan Amount Request:
Lenders typically have a limit on how much they are willing to lend you based on your income, credit score, and other factors.
If you request a loan amount that exceeds what they are willing to lend you, your application may be rejected.
· Lacking Proof of Income:
Getting a personal loan can be difficult if you have weak or no income documentation, which includes the following issues:
o Receiving your salary in cash, which makes it hard to prove your income.
o Lack of official payslips, whereby lenders are unable to verify your earnings.
o No deductions for EPF, raising concerns about your employment status.
o Being a contract staff member, which may lead to uncertainty about your income stability.
o Being under probation (unconfirmed as a permanent staff member), indicating potential job insecurity.
If you face these issues, you may need to seek out specialised loan agencies or work on improving your income documentation to increase your chances of loan approval.
Debt consolidation can improve your credit score in the long run when utilised to clear existing debt. However, initially, you may experience a temporary drop in your credit scores.
This isn’t necessarily a cause for concern, provided you consistently make on-time payments and refrain from accumulating additional debt.
Before pursuing a personal loan for debt consolidation in Malaysia, it’s important to:
· Possess a good or excellent credit rating to be eligible for a favourable interest rate.
· Evaluate your ability to comfortably manage the monthly payments.
· Be vigilant about any origination fees, as they might be subtracted from your loan disbursement.