Debt Consolidation Loans Myths Debunked

Consolidating your debt can be a good way to lower costs and reach your financial goals. Read on to debunk some of the common myths about debt consolidation to make better and more informed decisions regarding your loans.

ValueChampion Editorial Team

by ValueChampion Editorial Team on May 27, 2024

debt consolidation

Debt consolidation is one great way to make paying off your debt more manageable. Debt consolidation is a financial strategy most often used by those swimming in personal debt to help take control of said debt.

It involves combining your loans to repay all your debts with a single monthly payment instead of paying several minimum monthly payments over a number of bills. However, not every bill can be combined under the debt consolidation plan. Debt consolidation plans are for unsecured credit, so it excludes secured loans like car or housing loans. Debt consolidation also excludes any renovation loan, education loan, medical loan, credit facility granted for businesses or business purposes and/or outstanding debts under joint accounts.

Is it good? Is it bad? And most importantly, is it for you? Before we answer these questions, we first need to address the common misconceptions surrounding the topic of debt consolidation.

Read on to debunk some of the myths about debt consolidation with us.

Related: 3 Tips on How to Get Rid of Your Piling Personal Debt and Credit Card Balance

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Myth 1: Debt Consolidation Means Less Interest

It is a common misconception that a debt consolidation loan always offers lower interest rates and saves you more money on interest.

Truth: It does translate to vastly lower interest rates if you are consolidating credit card loans. However, this is not automatically the case if you are consolidating personal loans.

Although most people assume that paying back a single loan with a fixed interest rate results in less overall interest than multiple debts with their own individual interest rates, it depends on the interest rate differential between that of your original loans and your debt consolidation plan.

Credit cards typically charge 25% APR. In this case, a debt consolidation plan would be vastly less interest. However, personal loans sometimes charge less interest than a debt consolidation plan. For example, the HSBC debt consolidation plan charges an effective interest rate starting at 7.5% p.a. Meanwhile, their personal loan as an effective interest rate starting at 5.50% p.a. Hence, consolidating your personal loan into a debt consolidation loan in this instance does not provide you with savings on interest payments.

On top of that, lenders would look at your credit score before determining a suitable interest rate for you. If your credit score is higher, you are more likely to get a better interest rate. Otherwise, you may have to brace for higher interest rates.

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Myth 2: Debt Consolidation Leads To More Debt

One of the most dangerous pitfalls of debt consolidation is increasing your overall debt. This can happen when you use a debt consolidation loan to pay off your credit cards and then charge more payments to your credit cards.

Truth: A debt consolidation plan will not put you into debt. It is up to you to take charge of your finances to ensure that you do not go back into debt after paying off your debt consolidation loan. ]

If you are able to avoid charging more than you can afford to your credit cards, debt consolidation will not land you deeper in debt. After all, debt consolidation is a debt management strategy that aims to achieve the exact opposite by helping struggling debtors break a pattern of missed payments and hefty late penalties.

With debt consolidation, you will not have to go through the hassle of dealing with multiple creditors and thus, be less likely to miss or forget a payment deadline. You will only need to make a single payment towards your debt every month.

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Myth 3: Debt Consolidation Ruins Your Credit Score

Taking up a debt consolidation loan could cause your credit score to drop due to the hard credit inquiry.

Truth: In the long run, debt consolidation could cause your credit score to increase, as you reduce the amount of money you owe and make on-time payments. The drop in credit score is only temporary.

Paying off revolving lines of credit, like credit cards, can reduce the credit utilisation rate reflected in your credit report. Making consistent on-time payments—and ultimately paying off the loan—can also improve your score over time.

In addition, if you did not have an instalment loan on your credit report before, your credit mix will improve after getting the debt consolidation loan, causing your credit score to go up.

Related: How To Fix A Bad Credit Score

Debt Consolidation VS Refinancing

Before taking up a debt consolidation loan or any other loan per se, it is always wise and advisable to check out other alternatives and options to find what best suits your needs.

If the concept of refinancing is foreign to you, check out our analysis here to learn the pros, cons and all there is to know about refinancing.

Should you consolidate or refinance your debt? To decide between the debt consolidation and refinancing, you will first have to understand what each option means and the fundamental differences between the two.

Debt consolidation is used to pay off multiple debts with one lower-interest loan. Hence, you will only have one set of regular monthly payments with a fixed repayment term, instead of several different payments over an undetermined period of time.

In contrast, refinancing typically means negotiating new terms for existing debt, be it a lower interest rate or a different payment schedule. Transferring a credit card balance to another card with a 0% introductory annual percentage rate (APR) is one way to refinance credit card debt.

In what situation would taking up a debt consolidation loan or refinancing make more sense?

If you have high-interest debt or debts with variable interest rates, especially if it is made up of balances on multiple credit cards, taking up a debt consolidation loan would make more sense, allowing you to pay off your debt faster and maybe even reduce the amount you pay in interest. However, if your debt burden is smaller, it might make more sense to refinance instead.

Apart from debt consolidation loans and refinancing, there are other options to consider as well. To name a few, personal loans and personal line of credit are some alternatives worth exploring. For a more detailed comparison, check out our in-depth analysis over here.

Related: Debt Consolidation – How A Personal Loan Can Help Save Money Paying Off Credit Card Debt


It is typically not worth it to consolidate debt if you cannot get a lower interest rate than what you are already. However, if you are someone who is raking in multiple outstanding bills because you are unable to keep track of all your bills and make payment on time, you should definitely consider taking up a debt consolidation loan.

However, debt consolidation could prove to be counterproductive when you do not have a plan to pay off that debt. You will still need to be diligent with your budget and make your payments on time and in full.

If you would like to learn more about debt consolidation plans, check out our available resources.

Learn More About Debt Consolidation Plans in SingaporeFind Out More

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