Debt consolidation in a few easy steps

What is debt consolidation?

Debt consolidation is a simple and effective way to pay off your multiple unsecured debts with a bigger loan favouring lower interest rates and monthly payments.

Debt consolidation loans are often called balance transfer loans or personal loan balance transfers. Banks and money lenders or debt consolidation companies lend you this type of loan.

Debt consolidation, or balance transfer, as it is typically called in Hong Kong, can start as low as 3.0% APR, which is a lot lower than the interest rate you pay on a late credit card bill.

How do I consolidate loans?

When applying for debt consolidation, you sign up for a bigger loan with a low interest rate to pay off all of your other unsecured loans (credit cards/personal loans). The creditor, i.e. a bank or money lender that offers you the debt consolidation loan, helps you pay off all of your existing unsecured loans at once. Now you are left with only one liability, and that’s the debt consolidation loan. You are required to pay a fixed amount for a fixed period of time on a monthly basis to pay off this loan. Be mindful of the following when finding the best debt consolidation loan:

• The shorter the payment span, the lower the interest rate and monthly amount of payment and vice versa.

• The duration to repay the debt consolidation loans in Hong Kong is usually up to 72 months. However, there is great flexibility in scheduling payments according to one’s resources and credit score.

• The eligibility, credit limit, and payment conditions of debt consolidation loans vary with different consolidation companies.

• Comparing the debt consolidation loans being offered, along with the interest rates, is crucial to finding which one is best for you.

Benefits of debt consolidation:

• Debt consolidation loans offer significantly lower interest rates and/or monthly payment amounts in comparison to other personal loans and credit cards.

• The interest rate of debt consolidation loans is predictable and fixed up to the final payment, unlike other loans where interest rate tends to fluctuate.

• Debt consolidation is a quick and simpler way to pay off and deal with multiple loans/debts.

• It is always possible to negotiate the repayment period with debt consolidation loan companies /banks/money lenders.

• It saves you the mental pressure that otherwise you have to deal with due to numerous loans and the collecting agencies that call you often.

• It is best to pay a single debt consolidation payment with a fixed amount on a monthly basis rather than dealing with multiple loans and shuffling between their payment schedules regularly.

What is an unsecured debt?

A loan that is not secured by any assets is referred to as an unsecured loan. That means in the case of failure in terms of payment, the loan cannot be paid-off against any asset or by the guarantor. Unsecured debts are short-term liabilities, usually with shorter repayment periods.

Utility bills, credit cards, medical bills, etc. are a few examples of unsecured debts. You don’t have to secure any asset or bring a guarantor while indulging in such short-term loans.

How does debt collection work?

Unsecured debts possess a greater risk to the lenders, often called creditors. The risky nature of unsecured debts makes it difficult to recover the outstanding amount for creditors/lenders. In case the loan doesn’t get paid off, the creditors or lenders have to sue the defaulter for the recovery of the money they owe. In such a case, the court may order the defaulter to pay the amount owed to the creditors/lenders by using their assets.

Debt consolidation for paying off credit cards

Credit cards nowadays are used way too conveniently and broadly, making it easy for bills to pile up with a greater outstanding amount to be paid. In such scenarios, you often opt for instalments/loans from your bank. Unfortunately, that’s a serious error in judgement because credit cards usually charge up to 35% to 40% APR for any late payment. Consequently, over a period of time, you pay a significantly greater amount.

In contrast, a debt consolidation loan is a cost-effective way to pay off your credit cards. A debt consolidation loan usually charges a 3% to 7% interest rate depending on the credit score and predetermined evaluation criteria for the loan consideration. Take the following as an example:

• Let's say, you have HKD100,000 outstanding on one credit card plus HKD200,000 on another. You have a total of HKD300,000 to pay combined. One bank has a 35% interest rate and the second charges 30%. On top of the HKD300,000, you have to pay HKD195,000 in terms of interest. Needless to say, you have bigger monthly instalments and twice the headache to deal with.

• In such circumstances, a debt consolidation loan helps you with lower interest rates and monthly payments. Suppose you opt for a debt consolidation loan and the bank or money lender offers you HKD300,000 on 3% APR to be paid off in a year. This way, you pay HKD309,000 in 12 months - just HKD9,000 above your actual debt with 12 fixed instalments of HKD25,700 each.

When looking at it from this perspective, it is obvious to see why a debt consolidation loan might be your best option. However, before agreeing to one, be sure to compare it with other offers from various companies so that you apply for one that gives you the greatest value.

Should you have any enquiries relating to debt consolidation loans or finding the right companies that give you the best options, come talk to us at Lendela. We will be more than happy to lend you a helping hand.

Key Takeaways:

• Debt consolidation refers to the process of rolling multiple debts into one single loan, usually with a lower overall interest rate and a fixed monthly payment. 

• A debt consolidation loan is an effective way to clear all your existing unsecured loans like credit card debt at once by simplifying your finances and reducing interest costs. It also saves you from mental pressure and stress. 

• In addition to varying interest rates depending on individual portfolios, different debt consolidation companies also have their own credit limits, eligibility requirements, and payment conditions. It is always important to compare different loan options to find the one most suited to your needs.

• Use Lendela to compare and apply for the best debt consolidation loan from trusted banks and financial institutions in Hong Kong.