Do you have multiple loan obligations and mounting credit card debt? The weight of paying off a debt will not only cause financial stress but will also affect your emotional and mental health. So what can you do to keep up on repayments with several creditors?
One of your options is to apply for a debt consolidation plan. Your debts from multiple creditors will be consolidated into one payment at a lower interest rate. In doing so, you can streamline your finances, keep track of one repayment schedule, save on interest, and repay your debt quicker.
Here, we will dive into what debt consolidation is all about, how it works, and the types of debt you can consolidate. Plus, a comparison guide to find the best debt consolidation plans in Singapore.
What Is Debt Consolidation?
As the name suggests, debt consolidation is the act of combining all existing personal loans and credit card debts into a single loan with a more favorable interest rate. A debt consolidation plan (DCP) is a debt refinancing program for those who have incurred debts across multiple financial institutions. It is recommended only if you have an outstanding debt that is more than 12x your monthly salary.
How Does Debt Consolidation Work?
Instead of paying different amounts to different financial institutions each month, you can combine it all into a single monthly payment. The loan is repaid in automatic monthly payments, similar to personal loans, for a period of 1 to 10 years.
During application, you will have to show proof of your outstanding debt. For instance, you can provide a confirmation letter that shows unbilled credit card balances or personal loans.
DCP works by focusing your payments into one single account with a low interest rate. In doing so, you’ll have a better overview of how much you owe. Here are a few more benefits:
- Easy tracking and planning: You know exactly how much you’ll need to pay every month, making it easier to budget your finances.
- Potentially lower interest rates: Most debt consolidation plans have lower interest rates compared to credit cards or personal loans.
- Enforce financial discipline: When your DCP application is approved, you will not be able to open any unsecured credit facilities. However, you will be able to use a 1x revolving credit facility.
Types of Debt That You Can Consolidate
A debt consolidation plan combines all existing unsecured credit facilities, such as credit card debt and personal loans, into one debt consolidation loan account. However, there are certain categories of unsecured loans that are excluded:
- Loans under joint accounts
- Renovation loans
- Education Loans
- Medical Loans
- Business-related credit facilities
Example of How Debt Consolidation Plans Work
Let’s consider the following example: Jonathan, with a monthly salary of S$3,000, has a current outstanding balance of S$40,000 from three credit cards and personal loans. His monthly minimum payment is approximately S$1,275.
| Outstanding Balance | Interest Rate | Minimum Payment | |
|---|---|---|---|
| Credit Card 1 | S$15,000 | 26% p.a. | S$450 |
| Credit Card 2 | S$10,500 | 25% p.a. | S$315 |
| Credit Card 3 | S$8,000 | 25.95% p.a. | S$240 |
| Personal Instalment Loan (24 months) | S$6,500 | 11.32% p.a. | S$270 |
(Source: Singsaver)
Unfortunately, he can barely keep up with the minimum monthly repayment. Plus, his outstanding balance is 12x his monthly salary.
Let’s assume that Jonathan can get a DCP from HSBC payable over 8 years at 3.4% p.a.
| Current Payment | Debt Consolidation Plan | |
|---|---|---|
| Total outstanding balance | S$40,000 | S$42,000 (including fees and 5% allowance) |
| Interest rate |
|
|
| Total monthly repayment | S$1,275 | S$562 |
| Total interest payable over 1 year | S$9,337 | S$1,497 |
| Total interest payable over 8 years | S$74,964 | S$11,973 |
(Source: Singsaver)
With a debt consolidation plan, Jonathan’s monthly repayments are much more manageable at S$562. In the long run, Jonathan will be able to save approximately S$62,991 in total interest by the end of 8 years.
Best Debt Consolidation Plans in Singapore
Not all debt consolidation loans are made equal. So before you make a decision, compare the different DCPs in Singapore. Take into account the interest rates, the minimum and maximum repayment terms, and the additional fees.
| Participating Financial Institution | Interest Rate (EIR) | Loan Tenure | Processing Fee |
|---|---|---|---|
| HSBC Debt Consolidation Plan | 3.4% p.a. (EIR: 6.5%) | 1 to 10 years | S$0 |
| DBS Debt Consolidation Plan | 3.58% p.a. (EIR: 6.95%) | 1 to 8 years | S$99 |
| Standard Chartered Debt Consolidation Plan | 3.48% p.a. (EIR: 6.79%) | 3 to 10 years | S$199 |
| CIMB Debt Consolidation Plan | As low as 2.77% p.a (EIR: 7% p.a.) | 1 to 5 years | One-time fee of 1% |
| Citi Debt Consolidation Plan | 3.99% p.a. (EIR: 7.5%) | 3 to 7 years | S$0 |
| OCBC Debt Consolidation Plan | 4.50% p.a. (EIR: 8.41%) | 3 to 8 years | S$0 |
Which Is the Best Bank With the Best Rates/Plan?
At first glance, the CIMB Debt Consolidation Plan looks like a good option. It comes with the lowest advertised interest rate of 2.77% p.a. However, it also charges a one-time processing fee of 1% which is slightly higher than other debt consolidation plans.
That said, you must also take into account the impact of fees.
So, one of your best options is the HSBC Debt Consolidation Plan. It is perfect for those seeking large and long-term DCPs with a maximum loan tenure of 10 years. Plus, it also offers the lowest interest rates starting from 3.4% p.a. out of all the other banks in the table. In fact, the 3.4% p.a. flat interest rate is cheaper than the average rate.
How To Apply?
Eligibility
- Must be a Singapore citizen or Permanent Resident
- Minimum annual income of S$20,000 and S$120,000.
- Net personal assets must be less than S$2 million
- A total interest-bearing debt of more than 12 times the monthly income
Requirements
Here are the basic documents you need to prepare before applying for any debt consolidation plan:
- A copy of your NRIC (front and back)
- Latest Credit Bureau Report
- Latest income documents
- Latest credit card and unsecured loan statements
- A confirmation letter that states the outstanding balances of your unsecured credit card debt and personal loans
Steps to Apply
Step 1: Compare Debt Consolidation Plans
You need to choose the best debt consolidation plan that fits your ability to repay.
Step 2: Fill Up a DCP Application Form
Once you’ve chosen a DCP, make sure that you qualify for it. You can download and fill up a Debt Consolidation PDF application form.
Step 3: Prepare All the Required Documents
Don’t forget to provide a confirmation letter evidencing account information and outstanding balances.
Step 4: Submit Your Application
Once you submit your application online, you may be asked to authenticate yourself. Depending on the financial institution, a loan officer may get in touch with you or you will be guided through your application online.
Alternatives to DCP
If you’re paying off high-interest debts, a debt consolidation loan will combine all your debts into one scheduled repayment plan with more favorable rates. But while a debt consolidation loan is a good strategy, it is not for everyone. So what are your other options?
1. Personal Loan
In essence, debt consolidation loans are still personal loans. So if you don’t qualify due to citizenship or other unfulfilled requirements, you can apply for a personal loan in Singapore. Doing so will transfer all your debt under a different rate plan.
Compare different personal loans and find the best interest rates and terms. Once your personal loan is disbursed, immediately pay off your outstanding debt. Make a one-time payment to avoid taking on additional debt.
2. Balance Transfer Credit Card
With a balance transfer credit card, you can pay off your debt with a promotional zero interest, typically lasting 12 to 21 months. This option involves transferring your high-interest debts into a different credit line and paying it off without incurring interest during the introductory period.
However, with this option, you’ll need to pay off your outstanding balance within the introductory period. Or else, you will be paying the regular fixed interest rate and any balance carried over.
3. Home Equity Loan (HELOC)
Another alternative to paying off balances is a Home Equity Loan. This option is also called “cash-out refinancing”, “property equity refinancing”, and “mortgage equity withdrawal loan”. It usually offers lower rates than credit cards or personal loans.
Depending on the equity of your home, the loan amount can be significant. However, with this type of loan, you will be using your property as collateral. A home equity loan involves borrowing against the equity of your property.
4. Debt Settlement
If none of the options above is possible, you can always consider a debt settlement. This involves negotiating with lenders. You can work with a debt settlement company, a credit counselor, or get on a debt management plan. The aim is to negotiate a much lower interest rate or a longer repayment term so you can keep up with monthly repayments.
5. Bankruptcy
This is the last option if you can no longer pay off your debt. Bankruptcy is a legal process that may give you some reprieve from debt. However, it has a long-term effect on your credit. It will stay in your credit record for 7 to 10 years, which will make it difficult for you to apply for new credit or loans in the future.
Closing
When you use your credit card or take on a personal loan, you have to pay it back. Unfortunately, certain circumstances may arise making it difficult to keep up with repayments. A debt consolidation loan simplifies your way of paying off multiple debt balances. However, to properly manage your finances, your spending habits must change.
Key Takeaways
- A debt consolidation plan is perfect for those who have incurred multiple debts across financial institutions.
- DCP is only available for those whose outstanding debt is more than 12x the monthly salary.
- When your DCP application is approved, all your existing credit lines are suspended. You are not allowed to apply for new credit or loans while paying off your existing debt consolidation loan.
Need extra cash for emergency expenses? You can take out a personal loan from a licensed money lender in Singapore. Loan Advisor makes comparing loan plans quick and easy. They offer free, unbiased, and up-to-date information about the best loans available. Request up to three loan quotes for free today!
