With the easy availability of credit cards and personal loans, it can be easy to rack up multiple sources of debt. This can pose problems as each credit card or loan has its payment due date. In trying to juggle all of them, you may miss payments and incur penalty charges, adding yet more debt. Also, your cash flow will face disruptions as you will need to plan your purchases carefully around all the different bill payment dates.
If you’re facing such a situation, you should consider consolidating your debt to help manage your debt payments. You will also be able to lower the interest on your debt, which will help you get out of debt faster. Here’s everything you need to know about debt consolidation in Singapore.
Debt consolidation is a debt management strategy in which several existing debts are combined into one. The idea is to take out a loan to pay off all the different debts on hand at once. After that, you need only focus on paying off the loan you took.
This may sound like you’re simply borrowing money to pay money, but when done correctly, debt consolidation makes it easier to manage your debt in the following ways.
Combining several debts into one means you only need to manage one single repayment each month. This will significantly reduce the chances of missed payments (which incur late charges and damage your credit score), and allow you greater flexibility to meet other expenses.
Consolidating your debt can give you more time to pay off your debt. By spreading your loan over a longer period, your monthly repayments will be lowered, making it easier to cope with.
Debt consolidation in Singapore can also lower the interest charges on your debt, which helps you pay less total interest over time. Because compounding interest is used to calculate debt interest, don’t underestimate how much of a difference this can make to your finances.
Borrowers who require debt consolidation have two main options: Debt Consolidation Plan (DCP) or a debt consolidation loan.
This is a specific and unique debt refinancing programme (hence the capitalised name) that is offered by all financial institutions that provide unsecured credit and/or credit cards in Singapore.
As DCP is aimed at heavily indebted borrowers, the programme has strict qualifying criteria, rules, and conditions, summarised below:
- Available only to Singaporeans or Permanent Residents with annual income between S$20,000 and S$120,000
- Has interest-bearing unsecured debt from participating banks and financial institutions exceeding 12x monthly income
- All credit cards, personal loans, and other unsecured credit facilities will be suspended upon applying
- Cannot be used for certain loans such as mortgages, education loans, renovation loans, etc.
A debt consolidation loan refers to any loan that is used to pay off your other debts, leaving you with only one loan to deal with afterwards. Debt consolidation loans may also be known as debt management loans.
Zero-interest balance transfers are often touted as short-term debt consolidation loans in Singapore, but personal loans and moneylender loans can work too.
However, bear in mind that the ultimate goal is to make your debts easier to pay off, which means a loan taken for debt consolidation purposes must offer a lower interest rate, and preferably, give you a longer period to pay off your debt.
For instance, if you have several loans from licensed moneylenders with an interest of 4% per month, taking a moneylender debt consolidation loan with 3% per month interest will be advantageous.
|Debt Consolidation Plan (DCP)
|Debt consolidation loan
|Loan tenure: Up to 10 years
|Loan tenure: 1 to 5 years
|Interest rate: 3.4% to 6% per annum
|Interest rate: Depends on type of loan, credit score
|Availability: 14 participating banks and financial institutions in Singapore
|Availability: Banks, financial institutions, and licensed moneylenders
|Existing unsecured credit facilities will be suspended
|Suspension of existing unsecured credit facilities is not required
As shown in the table, DCP offers very low interest rates. It also has the longest tenure among unsecured loans – up to 10 years.
The combination of these two features makes DCP highly suited for borrowers who are heavily indebted to the point where it is extremely unlikely for them to get out of debt.
However, DCP also comes with severe restrictions, such as having your existing unsecured facilities suspended. This suspension kicks off the moment you apply for a DCP, and you will also not be allowed to apply for new credit cards or personal loans.
As such, DCP may not be suitable for all borrowers.
Debt consolidation loans have fewer restrictions than DCP, making for a more flexible option.
However, know that the exact terms, conditions, and requirements will depend on who you are borrowing from, and the loan you are getting.
In some cases, your credit score and borrowing profile will also influence the interest you are offered or may disqualify your application entirely.