• Personal Loan vs. Debt Consolidation Plan

    Both personal loans and debt consolidation plans are typically unsecured loans. This means they don’t require a collateral. A personal loan can be used for any purpose from organising a wedding to paying for a vacation or even medical bills not covered by your insurance. On the other hand, a debt consolidation plan can only be used to consolidate your existing unsecured loans to make a single payment every month.

    Let us compare the two based on the following parameters:

    Personal Loan Debt Consolidation Plan (DCP)
    You can use it for any purpose. You can use it to consolidate existing unsecured credit lines.
    Tenures up to 7 years. Tenures up to 10 years.
    You can apply for more than one loan at once. Upon approval, all existing credit lines will be terminated and you can’t apply for other loans.
    Singapore citizens, Permanent Residents and foreigners are eligible. Singapore citizens and Permanent Residents are eligible.
    The general interest range (effective interest rate) lies between 8% p.a. and 15% p.a. The general interest range (effective interest range) lies between 8.22% p.a. and 11.61% p.a.

    How Do the Loans Work?

    Personal Loan:

    • Interest rates and monthly repayments are fixed, making it easier to calculate your outstanding debt and manage your finances accordingly.
    • The application process is hassle-free and some banks approve loans within a day.
    • It is unsecured, generally speaking. Hence, you don’t risk losing a valuable asset under any circumstance.

    Debt Consolidation Plan (DCP):

    • Since all credit lines are consolidated, you will make a single payment every month, reducing the chances of missed payments or late payments.
    • Although all your existing credit lines will be terminated, you will receive a credit line with 1X (of your monthly income) revolving credit.
    • Upon approval, you will additionally receive a 5% allowance (only applicable for the first DCP loan) to meet your expenses.
    • If the approved DCP loan amount does not cover all your outstanding debt, you will have to bear the additional cost yourself.
    • You can apply for a DCP with only one financial institution at a time. However, you can refinance an existing DCP 3 months after approval.
    • You must continue making the minimum payment on all your credit lines until the approval of your DCP loan.

    What Are the Eligibility Criteria for the Loans?

    Personal Loan:

    • You can be a Singaporean citizen, PR or a foreigner to apply.
    • You must be aged between 21 and 65.
    • Some banks set S$20,000 as the minimum income requirement while some set S$30,000 as the base income requirement. Most banks allow you to borrow up to 4 times your monthly salary, provided your annual salary is between S$30,000 and S$120,000 and up to 10 times if your annual salary exceeds S$120,000.

    Debt Consolidation Loan:

    • Only Singapore citizens and Permanent Residents are eligible.
    • Your annual income should be between S$20,000 and S$120,000.
    • Your interest-bearing unsecured debt should be more than 12X your monthly income.
    • Your Net Personal Assets should be below S$2 million.

    What Is the Effect on Your Credit Score?

    Personal Loan: A personal loan, when repaid on time, can help improve your credit score significantly or build your credit history if you don’t have one. However, if you miss payments or make too many late payments, your score will take a hit.

    Debt Consolidation Plan: Upon the approval of your DCP, your credit bureau record will include the “Debt Consolidation” product code and the same will remain on your record for a period of 3 years after the closure of the plan.

    Personal loans and debt consolidation plans are useful in their own ways. You have to choose one depending on your needs and expectations.

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