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What is Debt Consolidation?
Debt consolidation is a financial management strategy where multiple high-interest debts (such as credit cards, personal loans, installment plans, etc.) are combined into a single loan with a lower interest rate and better repayment terms. This helps to simplify repayments, reduce financial stress, and save money on interest.
How Does Debt Consolidation Work?
The process can be broken down into a few simple steps:
1. Assess Existing Debts
- Calculate all outstanding loans, credit card balances, car loans, and other debts.
- Pay attention to each debt’s interest rate, monthly installment, and total outstanding balance.
- Evaluate the current financial situation, including monthly income, expenses, and debt service ratio (DSR).
2. Choose the Right Consolidation Method
Depending on the client’s financial status, there are several ways to consolidate debt:
- Personal Loan
- Ideal for consolidating credit card debts, unsecured loans, or multiple small loans.
- Loan approval depends on income and credit score.
- Fixed interest rate and structured repayment plan help manage cash flow.
- Mortgage Refinancing
- If the client owns property, they can apply for home refinancing to use a lower mortgage interest rate (e.g., 4-5%) to replace high-interest debts (e.g., 18% on credit cards).
- Suitable for homeowners with strong repayment capability.
- Balance Transfer
- Some banks offer low or 0% interest balance transfer plans for short-term debt consolidation.
- However, if repayments are missed, the interest rate can be high.
3. Apply for a Consolidation Loan
- Choose the appropriate loan option and submit an application to a bank or financial institution.
- Once approved, use the funds to settle all existing debts, avoiding the hassle of managing multiple payments.
4. Make a Single Monthly Payment
- The client now only needs to repay one loan instead of multiple accounts.
- The loan tenure can be adjusted to match their financial capability (e.g., 3 to 10 years).
- It becomes easier to control finances and avoid late payment penalties.
Key Benefits of Debt Consolidation
- Lower Interest Rates, Reduce Total Cost
- For example, credit card interest rates are typically 18%-24%, but by consolidating with a personal loan or home refinancing, the interest rate can be reduced to 5%-10%, saving a significant amount on interest.
- Single Payment, Easier to Manage
- No need to remember multiple due dates, reducing the risk of late fees or penalties.
- Easier to budget and ensure sufficient cash flow for repayment.
- Lower Monthly Repayments, Less Financial Stress
- Since debt consolidation extends the repayment period, monthly installments may be lower than before.
- Clients will have more cash flow for daily expenses or investments.
- Improve Credit Score
- If clients had multiple overdue payments before, consolidating their debts and making consistent repayments can gradually improve their credit score (CCRIS/CTOS).
- A better credit score increases their chances of getting home, car, or business loans in the future.
Example:
Customer A debt situation (before consolidation )
| Debt Type | Balance | Annual interest rate | Monthly payment |
|---|---|---|---|
| Credit card | RM 10,000 | 18% | RM500 |
| Personal loan | RM 15,000 | 12% | RM650 |
| Car loan | RM 20,000 | 9% | RM800 |
| Total | RM 45,000 | Multiple high interest rates | RM1.950 |
Through debt consolidation, customer A applied for a personal loan of RM45,000 with an interest rate of 7% and a term of 5 years:
| Debt Type | Balance | Annual interest rate | Monthly payment |
|---|---|---|---|
| Loan Consolidation | RM 45,000 | 7% | RM1,250 |
Results:
- Monthly repayment reduced from RM1,950 to RM1,250, saving RM700 per month!
- Total interest reduced, saving thousands of ringgit!
- Only one fixed repayment date, making management simpler!
Who Should Consider Debt Consolidation?
Debt consolidation is suitable for:
- Clients who have multiple debts (loans or credit cards) and find it hard to manage repayments.
- Those paying high interest on credit cards and want to lower their financial burden.
- Individuals struggling with cash flow and looking to reduce their monthly commitments.
- People who want to improve their credit score to qualify for future loans.
Common Questions About Debt Consolidation (FAQ)
1. Will Debt Consolidation Affect My Credit Score?
A: If clients make timely payments, their credit score will gradually improve because credit card balances are reduced, and their overall debt service ratio (DSR) is lowered.
2. Isn’t Taking a New Loan Making Things Worse?
A: Not necessarily! The purpose of debt consolidation is to replace multiple high-interest debts with a lower-interest loan, reducing overall interest costs and making repayments easier.
3. Who Is Not Eligible for Debt Consolidation?
- Clients with very low income or high debt service ratio (DSR above 80%) may not get loan approval.
- Those with poor CCRIS/CTOS records (many overdue payments) should improve their credit score first.
- Clients under blacklists or AKPK programs are unlikely to qualify for new loans.
Conclusion:
Debt Consolidation Makes Financial Management Easier!
The main goal of debt consolidation is to reduce interest, ease repayment stress, and improve credit scores. By combining multiple high-interest debts into one affordable loan, clients can better manage their finances, reduce burdens, and move towards a more stable financial future.
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