If you are feeling that your debts have climbed too high and you are unable to pay. No matter how hard you try whether getting cash from another card or paying a minimum credit card balance and those things seem do not help you at all. Then debt consolidation may be your solution. What is debt consolidation? Let’s find out.
Debt consolidation is to combine all debts you have whether they are informal or formal debts or other credit card debt then sum up to get a large money loan from an authorized financial institute and let them pay all debts then you pay by an installment plan with a cheaper interest rate. This is a benefit for anyone who intends to end all debt with just one payment. The suited debt for consolidating is the one with high-interest rate debt such as an informal debt. After consolidating all debt, we will get the formal interest rate which is lower.
However, to consolidate all debt, you must comply with all conditions from that personal loan financial institution which is regulated by the Bank of Thailand. The regulation is the bank can provide the maximum loan that does not exceed 5-times of the income for the no-guarantor personal loan. However, no guarantee is given because this is based on a different financial institution consideration. The considering factors are the payment history which has you ever missed any payment, what are your current loans and what is the maximum credit limit. However, good payment history with accurate payment will get a higher chance from the financial institute.
Once we know what debt consolidation is. Let's compare the pros and cons of it.
Pros of debt consolidation
- Every debt with different interest rates from every place will be combined. This helps you reduce all financial burden to just one place. This is easier and less confusing that which one you should pay first.
- No call from many creditors so less headache.
- A chance to get a lower interest rate, especially at the beginning of an installment plan. Most of the financial institutes give a lower interest rate than a credit card. However, in the end, to consolidate all debt, the interest rate may be higher than the credit card. If you have both formal and informal debts, there is a high chance to get less interest rate because most of the informal debts are more expensive than the in-system rate. If you have only credit card debt, you should consider and compare the interest rate before deciding.
- The monthly payment is cheaper which helps reduce your burden and increase your cash flow. For example, Mr. A monthly earning is 30,000 Baht with 4 credit card debts as 20,000 Baht, 30,000 Baht, 40,000 Baht, and 50,000 Baht respectively. Total debt is 140,000 Baht with a minimum 10% monthly payment which is 14,000 Baht which makes Mr. A incapable to pay. Moreover, paying a minimum rate is also makes him incapable of end any of the 4 credit cards. If Mr. A consolidates all debts by requesting a 140,000-Baht personal loan will result in paying only 6,806 Baht per month (calculating from the capital amount of 140,000 Baht with 25% interest rate per year and 3-years installment plan). This helps him reduce the monthly payment and also increase cash flow for further financial planning.
- Moreover, debt consolidation allows you to know how long you need to pay such as 3-years, or 5-years (as agreed with the financial institute) and also you can plan the future financial which allows you to end the debt. As mentioned above that if you are only capable of paying a minimum 10% credit card, you are unable to pay the whole debt because it is calculated an interest rate, collection fees, and other penalty fees from the credit card owner. Eventually, you feel like no matter how much you paid; the credit debt balance has not been even reduced.
Cons of debt consolidation
- Most of the interest rate for personal loans is higher than the credit cards. From the previous average at 20% per year, it may increase to an average of 25% per year. (You should compare the interest rates before deciding.)
- When you consolidate all debts from a credit card. Your debt balance will include principal, interest, and fees. So, this lump sum will be the new debt you have to pay which means that you have to pay a double interest.
In summary, debt consolidation has advantages and disadvantages. If you are experiencing debt problems and it seems increasing and effect to your cash flow. Therefore, debt consolidation may be your option. However, you need to compare the pros and cons then select the best solution for yourself. Anyway, the best way to deal with debt is saving, and do not be extravagant. Moreover, be patient, pay all debts and you have to understand that everything takes time. Do not give up and eventually, all debt will end and you can start a new and better financial you.
Nipapun Poonsateansup CFP®
Independent Finance Planner and Public Speaker