Debt Consolidation in Malaysia: How Does It Work?

With the rise in living costs and the allure of easy credit, many young Malaysians find themselves juggling several high-interest debts. They are increasingly burdened with debt, with a significant portion of income going towards servicing these obligations.

When it comes to indebtedness, Malaysian household debt has crossed over RM1 trillion.

Reports from the Malaysia Economic Monitor of the World Bank have indicated that about 27 per cent of households in Kuala Lumpur who earn less than the estimated monthly living wage tend to take on personal financing loans and credit cards to raise their living standards.

For anyone, the worst thing about dropping down into debt is to endlessly manage a long list of creditors, deadlines and payments interests.

If you are always tired of answering frequent phone calls from credit card companies, it is time for you to consider debt consolidation.

Begin by evaluating your debts, researching potential lenders, and considering speaking with a financial advisor.

What is debt consolidation?

Debt consolidation is the process of combining multiple debts into a single loan with a potentially lower interest rate and simplified payment process.

Just like the name suggests, debt consolidation is a unique financial strategy where multiple bills are merged into a single debt which is then paid off through a management program or by a loan.

It can be beneficial if it reduces your overall interest payments and helps you manage your debts more effectively.

This unique financial strategy is effective on high-interest debts such as credit cards. For the debtor, this is helpful as it reduces the monthly payment of the bills by lowering the interest rate.

It is a known fact that many borrowers struggle to keep up with deadlines of multiple bills from different credit card companies.

The good thing about debt consolidation is that it saves the borrower from the dilemma of dealing with the bills from multiple sources and provides a great relief option to pay off one source every month.

Believe it or not, this helps to save your money as well.

If you have an outstanding debt from more than one credit card, you can apply for a debt consolidation loan.

You can use this loan to pay off your credit card debt and then pay back the loan in monthly instalments.

The main advantage of this is:

  • The interest rate of the loan will be less than that of the credit card.
  • The annual percentage rate(APR) of the loans will be fixed, and you will be paying the same amount every month, unlike credit card debt where the APR can go up and down.

What are the different types of debt consolidation?

Debt consolidation can be broadly categorised into:

  • Secured loans
  • Unsecured loans.

Secured loans are backed by the assets of the debtor such as a car, house etc.

On the other hand, unsecured loans are not backed by assets which are more challenging to obtain back.

When compared to the secured loans, unsecured loans usually tend to have a higher interest rate with lower qualifying amounts.

There are several ways in which you could club all your debts together into a single payment.

Let us discuss some of the most common methods used.

1. Credit cards

In this method, you could consolidate all your pending credit card payments into a new card. Credit cards will be a great option to choose if the new card charges less interest for a specific period of time.

Additionally, you could use your existing credit card’s balance transfer feature if it offers special promotions on the transaction.

2. Student loan program

For students who are struggling to pay off their debt, several consolidation options are available from banks and other financial organisations.

This will help them to pay back the loans as quickly as possible without stretching it indefinitely for a long time.

3. Home equity loans

Using home equity loans for debt consolidation could be the best route to eliminating credit card debt.

Make sure that the interest rates on a home equity loan should be significantly less than what you pay back to the credit card companies.

4. Debt consolidation loan

This is one of the most common ways used to pay off multiple debts. A debt consolidation loan is a personal loan that the debtor uses to combine multiple debts into a single debt.

The payment will be through monthly instalments.

The unique speciality of the debt consolidation loan is that most debt consolidation loans have a fixed interest rate.

This means their interest rate will never change and will have equal payments.

Say for example, you are a debtor who has a pending balance on five credit cards. With a debt consolidation loan it is possible to club all the outstanding loans. You could pay back the money in monthly instalments instead of managing five separately.

How to apply for a debt consolidation loan?

A debt consolidation loan can be availed from several sources such as banks, online lenders, credit card unions etc.

It is crucial to bear in mind that debt consolidation loans are not a way to eliminate your debt, but instead, it offers a more structured and favourable way for you to pay back the debt.

Before applying for a debt consolidation loan, it is better to do background research to ensure that you are choosing the best path to eliminate your debt.

Eligibility criteria for debt consolidation loan

To be eligible for a debt consolidation plan in Malaysia, you must:

  • Be a Malaysian citizen or a permanent resident,
  • Be aged between 21 and 60 years old,
  • Have a minimum annual income, often around RM24,000,
  • Hold a good credit score.

Essential checklist to consider before applying for a debt consolidation loan

Choosing the right plan for consolidating your debts is pivotal to ensuring that you optimise your repayments and minimise overall costs.

1. Identify your budget

Before applying for a debt consolidation loan, it is necessary to identify how much debt you can afford after managing the necessities such as food, transportation cost, housing, electricity bills etc.

2. Examine the bills you want to consolidate

The best thing to do before applying for these loans is to examine which all debts you wish to consolidate carefully.

Secured debts cannot be included for consolidation. This includes car loans, mortgages etc.

Debt consolidation loans deal mainly with credit card loans.

3. Take a close look at your credit score

Understanding where you stand is the key to choosing the right loan option. You can check out your credit score from various online sources to have a first-hand idea of your current financial status and have realistic expectations.

4. Order your credit report

This will have all the details of your debts such as how much has been paid back, balance amount to pay etc.

Other factors to consider:

  • Interest rates: Compare the interest rates of different consolidation loans to find the most cost-effective option.
  • Repayment period: Consider how the length of the repayment period will affect your monthly payments and interest over time.
  • Lender’s reputation: Research lenders to ensure they are reputable and have good customer feedback.

Fees and charges: Be aware of any additional fees that may be associated with consolidating your debts.

Advantages of debt consolidation

1. Provide a single payment option

With debt consolidation, you could club all your debts into one, instead of multiple, which will result in

  • Lower monthly payments
  • Longer pay off period

If you are someone who has lots of pending debts, consolidating all the debts into one will make you feel that a huge weight has been lifted off from your shoulders. It is true that you still have to pay back the money you owe, but the good thing is that:

  • You can focus on one payment source, &
  • The deadline for multiple payments has gone.

2. Low-interest rate

The main problem with having multiple debts is that each individual debt will have an added interest to the total debt amount.

Say, for example, you have a personal loan amount with interest 29.95% p.a and debts from multiple credit cards at 26% p.a

The problem would get even worse if you missed the payment for a month, as you will have an extra interest compounded for the next month.

A debt consolidation loan will potentially help you reduce the burden by considerably decreasing the total interest rate, and you could focus on one interest rate alone.

3. Improve the credit score

One significant benefit of debt consolidation is that it will help to boost your credit scores over time, with consistent payments.

Initially, your credit score may dip when you take out a new loan because it increases your level of debt. However, if you maintain regular payments, it can improve your credit scores.

On the other hand, failing to make a payment can negatively impact your credit score and will pose a significant hurdle when you apply for a loan in the future.

A low credit score could mean:

  • Increased interest rates
  • Lesser chance of getting a loan

4. Fixed amount to repay

Having a well-structured debt consolidated plan will help you to better manage your finances by allowing you to pay the same amount every month.

Here you will know what to expect instead of having to suffer from a bill shock at the end of every month. You could easily pre plan your monthly expenses and allocate a budget to pay back the loan amount.

5. Less stress

Studies have shown that people who are always worried about debt face several mental problems such as anxiety and depression.

For someone who is continually running to pay off multiple debts, clubbing all the debts into one will be a great boon to alleviate stress and clear his mind with less complexity in managing debts.

Taking control of the finances and allowing you to pay back the debt in a single payment every month will help you to clear up your mind and gain the confidence to be in a better financial position.

6. Helps to pay back faster

Credit card companies earn by the interest you owe, and it is common for credit card balances to go unpaid for several years.

One main benefit of debt consolidation is that consolidated loans have a shorter payback period which will ensure that you will be free from the debt quite soon instead of endlessly stretching the payback time for years.

Pitfalls to avoid in debt consolidation

Consolidating your debts can be a smart financial move, but it comes with risks. Being aware of these can help you avoid falling into deeper financial troubles.

Potential scams:

  • Be cautious of companies that promise to wipe out your debts instantaneously.
  • Avoid any plan that requires upfront fees before providing any services.
  • Always read the fine print and understand all the terms and conditions.

Mismanagement risks:

  • Consolidating your debts does not mean they are forgiven; you still owe the money.
  • Avoid accumulating new debt while paying off the consolidation loan.
  • Stick to a budget to prevent overspending and falling back into debt.

To gain a better understanding, visit the official website of Credit Counselling and Debt Management Agency (AKPK), which provides comprehensive debt management services.


What types of debt can I consolidate?

Typically, you can consolidate credit card debts, personal loans, student loans, medical bills, and other unsecured loans.

How long does the debt consolidation process take?

The length of the process can vary, but it may take several weeks to apply for and receive a debt consolidation loan.

Does debt consolidation affect your credit score?

Yes, it can affect your credit score both positively and negatively, depending on how you manage your consolidated loan.

Can I use my home equity to consolidate debt?

Yes, homeowners can use home equity loans as a method of debt consolidation, often at a lower interest rate.

Do I need collateral for a debt consolidation loan?

Some debt consolidation loans, like home equity loans, require collateral, while others, such as personal loans, do not.

Is there a fee for debt consolidation?

Some lenders may charge origination fees, balance transfer fees, or closing costs for debt consolidation loans.

How does debt consolidation affect my monthly payments?

Debt consolidation can lower your monthly payments by extending the repayment period and reducing the interest rate compared to your original debts.

Will I save money with debt consolidation?

If the interest rate on the new loan is lower than your current rates, you may save money on interest payments over the life of your debts.

Are there alternatives to debt consolidation?

Yes, alternatives include debt management plans, debt settlement, and in severe cases, bankruptcy.

For additional questions and professional guidance, reach out to our experts at

Final Words

Debt consolidation is one of the effective means to streamline your budget and to provide you with a natural alternative to pay off your debt.

Before finalizing your mode of payment, it is crucial to research the alternatives available and to choose the most effective option that will fit your budget. Get in touch with a reliable debt collector agency to get more clarity on the subject.