How to manage your money, get out of debt and achieve financial freedom

Debt consolidation not only allows for more favourable loan terms, but also offers a disciplined way of tackling multiple debts

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Being in debt can be scary. But you can turn things around with a little know-how.

Debt can creep up on you like a thief in the night. It starts innocently enough - perhaps you let your credit card balance roll over for a few months or take out a personal loan to tide you over until payday. The next thing you know, your mailbox is bulging with bills.

If you are juggling multiple credit card bills and/or unsecured loan repayments, signing up for a debt consolidation plan can be a clever way to make repaying your debt a little easier.

What is debt consolidation and how it can help you get your finances under control? (Watch the video up top or read on to find out more.)

hsbc debt consolidation plan, how to get out of debt and achieve financial freedom

Whether you're dealing with job loss, reeling from a pay cut or struggling with multiple mortgage and bill payments, you are not alone in experiencing cash flow issues this year, given the current economic recession.

Turning to credit card debt or personal loans can be a short-term way to cope with day-to-day costs, but the relief they provide can quickly turn sour - especially if you are not confident about being able to pay your bills in full each month.

To make matters worse, unsecured debt, which refers to loans that are not backed by collateral, can come with high interest rates, causing your debt to grow faster than a hungry teenager.

A good debt consolidation plan can help alleviate all of these pain points.

hsbc debt consolidation plan, consolidate
With debt consolidation, you can consolidate everything you owe into one new loan: A single repayment plan with a much lower interest rate. PHOTO: SPH

First of all, debt consolidation enables you to transfer all your unsecured debt to a single repayment plan. You will only need to pay one bill every month, which means less time wasted and less stress.

Next, debt consolidation lets you take advantage of attractive interest rates, instantly saving you money. The interest rate charged by the financial institution offering the plan will replace the previous interest rates you were paying.

Debt consolidation plans can also come with a longer loan tenor than your current loans'. If you need to, you can repay your debt at a more comfortable pace without worrying about falling behind on your payments or receiving angry phone calls from your creditors.

When you successfully apply for a debt consolidation plan, you will not be able to sign up for new unsecured loans or credit cards until your debt has fallen to eight times your monthly salary. But fret not. This is just a temporary situation that helps you avoid accumulating new loans until your existing debt is brought under control.

By helping you pay off your loans more quickly, easily and cheaply, debt consolidation can be a useful tool to help you eventually achieve financial freedom.

Just as you shouldn't buy a new computer without understanding its specs, you should know what factors to consider when evaluating a debt consolidation plan. Here are five questions you should ask when choosing a debt consolidation plan.

1) What is the interest rate?

Interest rate is one of the most important factors to consider when choosing a debt consolidation plan. Simply put, a lower interest rate makes the loan cheaper for you. So, you should try to select a plan that offers a more competitive interest rate than what you are currently paying on your loans.

One easy hack is to use HSBC's loan calculator to work out your monthly repayments. This information can come in handy when selecting a debt consolidation plan.

Banks often use the terms "flat rate" and "EIR" to describe their debt consolidation plans' interest rates.

Flat interest rates are charged based on your principal amount. For instance, if you borrow $10,000 at a flat annual interest rate of 3.5 per cent, you will pay $350 worth of interest per year.

Effective Interest Rate, or EIR, is typically higher than flat interest rate, and measures the true interest rate you are actually paying when taking into account all other costs incurred such as processing fees, the cost of compounding interest and your repayment schedule.

HSBC Debt Consolidation Plan offers flat interest rates from as low as 3.4 per cent per annum. The processing fee is waived, which enables the EIR to be kept as low as 6.5 per cent per annum *.

2) How much are the processing fees?

A one-time processing fee is charged by some banks at the start of a debt consolidation plan. This fee must be paid in a lump sum or as a percentage of the loan amount.

Processing fees make a plan more costly for you and raise your EIR. But of course, nobody wants to have to pay more money, especially when already in debt!

Luckily, HSBC Debt Consolidation Plan waives the processing fee so you don't have to worry about hidden costs when transferring your debt to the plan.

3) Are you eligible to take up the plan?

hsbc debt consolidation plan, checklist

Debt consolidation plans in Singapore are typically meant for Singapore Citizens and Permanent Residents only.

You will have to fulfil certain income requirements to successfully apply for a plan. In HSBC's case, you must have an annual income of $30,000 to $120,000 for salaried employees, or $40,000 to $120,000 for self-employed or commission-based earners.

In addition, your total credit card and unsecured loan balances should be equivalent to at least 12 times your monthly income.

4) How long is the loan tenor?

Loan tenor is the length of time over which the debt consolidation plan will run. If you need more time to repay your loan, you can opt for a plan with a longer loan tenor.

Opting for a longer loan tenor enables you to spread your payments over a longer period of time. However, do note that in some cases, you could end up paying more overall than you would under your existing arrangements, even if the interest rate on the new loan is lower than those you are being charged by your current loan providers.

Conversely, if you are able to repay your debt within a shorter period of time, you can opt for a shorter loan tenor in order to lower the total sum of interest paid over the course of the plan.

Before switching to a debt consolidation plan, you should consider whether you will have to pay any early repayment charges to your existing loan providers, and carefully evaluate whether this new loan arrangement would be appropriate given your circumstances.

HSBC Debt Consolidation Plan offers a loan tenor of up to 10 years, giving you the freedom to pay down your debt as quickly or as slowly as you like.

5) Are there currently any promotions?

A good promotion can sweeten the deal and save you money.

If you currently have a Debt Consolidation Plan with another bank and decide to switch to HSBC's, you will receive 5 per cent cashback of your loan amount upon approval of your plan.*

To find out more about your financial health, you can also receive a free copy of your Credit Bureau Report sponsored by HSBC.

HSBC Debt Consolidation Plan can help you manage your debts. To find out more, leave your contact details with HSBC here and a loan specialist will get in touch within one working day.

*Terms and conditions apply.

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