The enhanced community quarantine throughout Luzon has crippled our economy, causing a high percentage of people to stop working and stay at home in hopes to slow the spread of COVID-19. But our expenses never stop—food, hygiene kits, and bills. Without the next pay coming, it will take a while before our savings run out. Some of us may apply for multiple loans, and messing up our payment deadlines is a toll we need to face even the pandemic ends.
To control your cash flow, let us have an understanding of what debt consolidation is.
What is Debt Consolidation?
Debt consolidation is one way of managing your account payables or unsecured loans. Through this, you are simplifying the schedule of your payments directed to various creditors into a single monthly payment, which is easier to remember and process. You also get lower rates to pay off on top of the principal amount by aggregating your debts into one.
How to consolidate debt
There are many options to combine all your unsecured debts. Here are the following ways:
1. Credit card balance transfer
If you are a holder of multiple credit cards, you have an option to move your balance from a source account to another card (destination account), and pay the aggregate balance at a lower interest rate. However, the destination card must have a limit to cover the total amount being transferred and its inherent balance amount as exceeding credit limit can get you a penalty.
Also, this comes with eligibility and some fee, though some banks charge 0% as an introductory rate. The total balance should be paid off at the promotional period to avoid another increase in charges.
2. Debt consolidation loans
A debt consolidation loan is another option to manage your cashflow. This type of loans is commonly offered by commercial banks in the country to applicants who are employed individuals and those who can present strong proof of regular income have the high percentage of being approved for this loan. Banks charge annual interest rates that range from 13.2% to 22.7%.
It is recommended that applicants should review their financial needs and match them with the terms, conditions, and requirements of the bank to maximize the debt consolidation loans. The downside is that you need to give a larger amount of payment each month in a short period to be debt-free.
3. Cash–out refinance
Cash-out refinance applies to home mortgages. It is simply applying for another housing loan to pay off your outstanding home loan in a longer period but with a lower interest rate. It also saves you the amount of money (if you remain from the payment structure you initially signed up for), and thus, it frees up the cash you can use for other purposes, including debt consolidation.
However, this type of debt relief puts your house at stake. If you are unable to give your monthly payment at the agreed terms, your property may be placed for foreclosure. Remember that there also other charges such as origination costs, house appraisal, and closing fees involved with home loans that will be carried over the use of cash-out refinance.
4. Credit card amnesty
Credit card amnesty in the Philippines, also known as Inter-bank Debt Relief Program, assists cardholders who are highly indebted and financially distressed. The program restructures the payment method into a friendlier repayment plan for cardholders to settle their consolidated card debts and get back on track to the more responsible use of credit cards.
Not everyone is eligible for a debt relief program organized by the Credit Card Association of the Philippines (CCAP). Only cardholders in financial distress but deserving a second chance, where criteria are observed by the assessment of CCAP, Banko Sentral ng Pilipinas (BSP), and participating banks.
Benefits of debt consolidation
Here are the advantages of consolidating your debts:
- Combining all your loans into a single payment makes it easier to settle than paying off multiple loans.
- Your payment schedule is easier to remember and more organized, which is beneficial to monitoring the money you shell out.
- The process lets you move to repayment with lower interest rates.
- The process also allows for a lower amount of monthly payment.
- You have the option to restructure your debt repayment for a longer period.
Disadvantages of debt consolidation
Here are the drawbacks of consolidating loans you should watch for:
- Since the final amount is an accumulation of various debts, you are going to pay higher than the loan principal prior to the consolidation.
- Since the repayment period is now longer, the interest rate you will be paying is of higher value in the long run.
- You are obliged to pay your debt in the shortest period you can, especially before the expiry of 0% promotional rates of applicable charges.
- The longer repayment period may backfire if you are unable to pay the agreed terms and cause more charges.
Consolidation of debts does not zero out what you owed; rather it makes your payment obligations more manageable. Other than this process, it is still best to have the discipline of paying on time.