Debt Consolidation: What is a Debt Consolidation Loan? Popular Loan Products Comparison

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A debt consolidation loan is a financial product designed to provide relief for individuals burdened with a large amount of debt. While it is sometimes associated with debt-restructuring plans or bankruptcy, debt consolidation offers an alternative solution. In this blog post, we will explain what debt consolidation is, how it can benefit you, and discuss popular debt consolidation loan schemes that are available.

Table of contents: Debt Consolidation

What is debt consolidation?

A debt consolidation loan is a lending scheme offered by a bank / financial institution to consolidate / merge / restructure an individual’s existing debt into a single debt. It is also known as a balance transfer loan. The scheme is usually made for unsecured debts, which commonly include private loans, revolving loans, and credit card loans.

This type of loan can save on interest rates and shorten the overall repayment period, helping you clear your debts sooner.

What is the average interest rate on a debt consolidation loan?

The effective interest rate of the debt consolidation loans can generally be 2% to 4% per year. Credit cards, on the other hand, typically incur 30 to 40% interest on overdue payments. Thus, if you are heavily indebted or face a debt crisis, a debt consolidation loan is definitely an effective debt relief option.

Comparison of the characteristics of a debt consolidation loan and a private loan

Debt consolidation loans are solely designed for debt repayment purposes, so they have different characteristics and uses than private loans. For instance, when applying for such loans, the banks may request proof of debt repayment to make sure that the funds are used for debt repayment.

Despite the restrictive usage, the debt consolidation loan application process is roughly the same as for private loans. The applicant is usually requested to prepare for the following:

  • 18 years of age or older
  • Identity documents (HKID, passport, etc.)
  • Personal proof of income (bank statement for the 3 recent months)
  • Proof of current residence within the last 3 months or half a year (utility bill)

In addition, a debt consolidation loan application may require the following:

  • Latest unsecured loan or credit card statement.
  • Agreement for an installment loan that needs to be transferred.

What’s the difference? Debt consolidation loan vs personal loan

The main purpose of debt consolidation loan is to consolidate multiple debts into one, allowing the borrower to focus on repaying a single amount each month. This can help to saving interest expenses and simplify personal finances, while also avoiding a drop in credit score due to borrowing from multiple sources.

However, it is important to note that when applying, banks may require proof of repayment to ensure that the funds are not used for other purposes.

While personal loan can be used for different purposes like renovation, wedding expenses and more, but usually it has a shorter repayment periods and a higher application requirement.

Loan Features Balance Transfer Loan Personal Loan
Purpose Repaying debts, consolidating credit cards Renovation, wedding expenses, investments, business startup, etc.
Annual Interest Rate As low as 2% to 4% As low as close to 1%
Repayment Term 3 to 84 months, adjusted based on the borrower’s ability Up to 60 months
Maximum Loan Amount 21 times the monthly salary / HK$2 million (whichever is lower) 18 to 23 times the monthly salary / HK$3 million (whichever is lower)

How to consolidate various debts with debt consolidation loans?

Debt consolidation loans are large loans that are sufficient to repay all existing unsecured debts. When applying for debt consolidation loans, the issuing bank or financial institution will assist you in repaying all debts immediately.

After the banks approve the loan, they will directly deposit the funds into the borrower’s credit card account or other loan account, leaving only the balance transfer as the remaining debt. Afterwards, the borrower only needs to gradually repay this debt within the repayment period by making fixed monthly payments.

In Hong Kong, the maximum term for balance transfer loans is generally 72 months, although certain institutions may offer up to 84 months. Typically, the shorter the repayment period, the lower the interest rate, and vice versa. However, the actual terms depend on the borrower’s repayment ability and credit score.

Real-life example: Repay credit card debts with debt consolidation loans

The most common use of debt consolidation loans is to pay off all credit card debts at once. Suppose you have 2 overdue credit card debts, one totaling HK$150,000 and the other totaling HK$200,000, for a total debt of HK$350,000.

Assuming both banks have an annual interest rate of 30%, if you only paid the minimum monthly repayment amount, it would take you 462 months, or 38 years and 6 months, to pay off the debts. The total interest paid would be HK$887,048!

On the other hand, if you apply for a balance transfer loan to repay your credit card debt with a 3% annual interest rate and a 72-month repayment plan, the interest you would have to pay is only HK$32,424. Not only will you be able to repay the debt faster than the minimum payment, but you will also pay less in interest.

Here is a repayment comparison between a debt consolidation loan and credit card minimum repayment:

Comparison Between A Debt Consolidation Loan And Credit Card Minimum Repayment
Repayment Method Assumed Annual Interest Rate Repayment Period Monthly Repayment Total Repayment
Debt Consolidation 3% 72 months HK$4,552 HK$382,424
Credit Card Payment Minimum Repayment 30% 462 months 4% of the outstanding balance HK$1,237,048

Comparing debt consolidation plans

After understanding the purpose of balance transfer loans, we will next compare the balance transfer loan plans offered by different institutions.

DBS debt consolidation loan

DBS Debt Consolidation Loan offers a low monthly flat rate of 0.11% with a maximum loan amount of HK$2,000,000. It helps pay off credit card debts and provides extra cash.

Sponsored
DBS logo

Monthly Payment

HK$13,070

Monthly Payment
MoneySmart Exclusive
Loan amount up to HK$2,000,000
APR*
6.48%
Total Amount Payable
HK$300,000
Total Interest Payable
HK$13,680
Monthly Payment
HK$13,070
MoneySmart Exclusive:

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Valid until 30 Apr 2024

Welend card debt consolidation loan

WeLab Bank Card Debt Consolidation Loan offers efficient and speedy service to suit your needs. With the potential to save up to 97% on interest expenses and no handling fee, their Debt Consolidation Experts will tailor a personalized repayment plan for you. The loan tenor can be up to 72 months, and you can borrow up to HK$1,500,000 or 18 times your monthly salary, whichever is lower.

WeLend logo

Monthly Payment

HK$12,860

Monthly Payment
MoneySmart Exclusive
The lowest APR
1.88%
Total Amount Payable
HK$308,640
Total Interest Payable
HK$8,640
Monthly Payment
HK$12,860

AEON debt consolidation loan

AEON Debt Consolidation Loan helps you combine all debts into a low-interest loan with up to 60 months repayment period. Pay off debts faster and achieve financial freedom!

AEON Credit Service logo

Monthly Payment

HK$13,100

Monthly Payment
Bank Promo
APR*
4.64%
Total Amount Payable
HK$314,400
Total Interest Payable
HK$14,400
Monthly Payment
HK$13,100

Frequently asked questions: Debt consolidation loans

What is a debt consolidation loan?

A debt consolidation loan is a lending scheme offered by a bank or financial institution to consolidate an individual’s existing debt into a single debt. It helps simplify repayment and potentially save on interest rates.

What are the benefits of a debt consolidation loan?

Debt consolidation loans can help individuals save on interest rates, shorten the overall repayment period, and simplify their finances by merging multiple debts into one.

How does a debt consolidation loan differ from a personal loan?

Debt consolidation loans are specifically designed for debt repayment purposes, while personal loans can be used for various purposes, such as renovation, wedding expenses, investments, or business startup. Debt consolidation loans often require proof of debt repayment.

How can debt consolidation loans help with credit card debts?

Debt consolidation loans can be a useful tool to pay off credit card debts. By consolidating multiple credit card debts into one loan with a lower interest rate, borrowers can save on interest expenses and potentially repay the debt faster.

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