Debt Consolidation Part 2: Doing it yourself?

Debt Consolidation Part 2: Doing it yourself?

 

We shall look into two common “do-it-yourself” (DIY) debt consolidation methods used in Malaysia

While both these DIY debt consolidation loans have its equal share of advantages and disadvantages, they also have the potential to increase your existing debt if you are not strategic enough. So, make it a point to understand each option carefully, pick the right approach and get your debts under control. Always remember; with great debt, comes great responsibility!

 

1. Undertaking a personal loan

A personal loan is a form of an unsecured loan (not tied to any assets/collaterals you may own) and has a fixed repayment period which you could negotiate with the bank, provided your credit ratings are in good shape.

This is a viable option when you have accumulated significant credit card debt and imposed with the maximum interest rates. Banks usually enforce these interests based on a tiered rate structure and the norm in Malaysia is between 17 to 19% per annum (you can find out using GoBear Malaysia’s Credit Card Comparison tool). These rates are high and will continue to rise, as banks tend to compound the interest. So, the longer you delay payment, the higher the final amount to clear.

Comparatively, Malaysian banks typically offer 8 to 10% interests per annum for personal loans with three to five months repayment term.  These interests are way lower than credit cards and offer more possible saving on interests.  Below is a simple table to illustrate:

 

 

Debt

Interest p.a

Final payment after 3 years

Interest accrued

Credit Card

RM 20,000

18%

RM 30,800

RM10,800

Personal Loan

RM 20,000

9%

RM 25,400

RM 5,400

Potential savings

9%

 

RM 5,400

 

As you can see a credit card debt of RM 20,000 has more than 50% interest in three years. Comparatively, a personal loan with half the maximum interest result in a lesser interest rate for the same duration.  In theory, you saved half the amount.

It’s advisable to cancel your credit card, the moment it’s cleared and focus your efforts towards clearing the personal loan right away. This is to avoid relapse and acquiring of new outstanding balances. You are less likely to gain more loans to clear additional credit card debts and plus it will greatly affect your credit score!

Also, while most banks do offer competitive loans, there are discrepancies that you need to take note off. For example, Hong Leong’s Personal Finance, HSBC’s Amanah Personal Financing I and Alliance CashFirst Personal Loan offer 7%, 7.68%, and 7.5% interest respectively. Yet, only Hong Leong accepts the application with minimum annual income of RM 24,000, a crucial info for those earning less than RM 3,000 per month.  

Again, such information can be easily obtained via GoBear Malaysia’s Personal Loan Comparison Tool.

 

 

2. Perform a credit card balance transfer

The next option is to find a credit card with a good balance transfer program. Basically, you transfer the entire outstanding balance on your existing credit card (or cards) onto a new credit card that offers a lower interest rate. The underlining principle is similar to that of a personal loan, which is to reduce the exorbitant maximum interest rates that you may incur. But, you do this in a shorter period.

Alternatively, most banks in Malaysia offer attractive promotional interest rates for balance transfer and sometimes, even 0% interest rate. Such offers come with a time-limit ranging from three to six months (or even longer) and are especially useful for people planning to clear off their debt within a short time. However, there is also a chance fir dramatic increase in the interest rates once the agreed timeline is over. Hence, remember to check with the bank on what the exact amount of the resulting interest or your may be in a tighter spot once the time-limit is exceeded.

Suppose Syawal has RM 10,000 in outstanding balance to pay off and he managed to secure a bank that offers 0% interest rates for six months. He won’t be charged with the interest for the first six months. This means the money he pays on a monthly basis will actually reduce the RM 10,000 he has with the bank.  If Syawal is diligent, he could use the balance transfer to settle his debt and then make a payment of RM 2,000 per month to clear off his balance transfer and be debt free. Sound ideal right?

But what if Syawal earns less than RM 3,000, now he can’t afford to fork out RM 2,000 to clear his balance transfer and after the six months are up, he is back to servicing an outstanding balance with the regular interest of 18%. Now, Syawal is back on the debt cycle.

In short, you should always weight your options before embarking on a DIY Debt consolidation plan. Knowledge is everything and that involves having a good understanding of your goals for the debt consolidation loan. Determine your objectives for the debt consolidation loan whether it is to:

 

  1. lower your monthly payments

  2. have a cheaper interest rate

  3. have a shorter repayment term

 

In addition, always review the terms and conditions of your personal loans or credit card thoroughly. Request for a hardcopy of the fine print and if need be, seek clarification from the bank on things you are not sure about.  Always make an informed decision as only by knowing your options, you are able to determine the right approach and ultimately manage your debt better.

 

Until next time,

The GoBear Team


 

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