Debt Consolidation is a service now being offered by all prominent banks in Singapore. The plan is a refinancing programme which can help a borrower consolidate their various lines of credit across different financial institutions with one financial institution. The Debt Consolidation Plan (DCP) works only for unsecured lines of credit such as outstanding credit card balances or a personal loan. Loans that fall in certain categories such as secured loans like a renovation loan or home loan, car loan, business loans, and even an education loan cannot be consolidated under this refinancing programme.
The debt consolidation loans are useful for people with high interest on their debts and those who face a lot of difficulty in making their monthly instalment payments. The main benefits of consolidating debts and applying for a consolidation loan are listed below.
Suppose you have five different debts, a home mortgage, car loan, a personal loan and some balance in two credit cards, you need to be aware of each of these debts and pay 5 receipts each month. With debt consolidation your 5 debts will be consolidated into one, so you will need to pay only one bill each month, which will be easier to plan and you will find it easier to budget your expenses.
With five different debts, the higher interest rate can be as high as 18 percent and lower rate of interest may be 3.5 percent. After consolidation, the consolidated debt can have an interest rate of only 3.5 percent, so your average rate is significantly reduced and thus your overall debt and instalment payment that you have to make each month.
The debt consolidation loans can reduce the total amount of money that has to be paid monthly, that is, after the consolidation of debts, you will have to pay less money as a single monthly payment compared to the total amount of money that you would otherwise need to pay for separate instalments.
When you consolidate your debts, you will be able to get a clear picture of the amount that you owe. Hence, you will be better equipped to play your payments and then also plan your budget in such a manner that you can pay more amounts each month. Therefore, you will be able to become debt-free within a short period of time.
When you apply for such a loan, your credit history and as a result your credit score will also improve. The lenders will be aware that you are making an attempt to be debt-free and are no longer a defaulter. Besides, the regular payments that you make will be reflected in your credit history and so your credit score will improve in the process.
Try to avoid applying for debt consolidation loans that ask you to pay very high monthly amounts or promise you a big reduction in your debt, because they are very risky.
|DCP Providers||Interest Rates||Tenure|
|HSBC DCP||14.1% - 15.7%||1-10 year|
|Citibank DCP||10.5%||Upto 84 Months|
|Standard Chartered DCP||9.55% - 11.77%||10 Years|
|DBS DCP||8.22%||96 Months|
|OCBC DCP||10.46% - 11.08%||8 Years|
|UOB DCP||8.22% - 9.04%||72 Months|
|Maybank DCP||8.48%||10 Year|
|CIMB DCP||7%||8 Years|
To explain how a DCP works, let us take an example of a borrower who has a monthly salary of S$4,000 but has open lines of unsecured credit amounting to S$50,000. The outstanding balance can comprise of multiple outstanding dues from different credit cards and a personal loan. Let us assume that out of the S$40,000 total due, S$15,000 is from one credit card, S$7,500 each on two other credit cards and S$10,000 on a personal loan.
The borrower’s calculated monthly payments will look like the table below:
|Type of Credit||Outstanding Balance||Interest Rate||Monthly Payment|
|Credit card 1||S$15,000||26% p.a.||S$455|
|Credit card 2||S$7,500||26% p.a.||S$375|
|Credit card 3||S$7,500||26% p.a.||S$375|
|Personal loan||S$10,000||7% p.a.||S$309|
Totalling up the monthly repayments of the borrower, we get S$1,514 which is almost 40% of the borrower’s monthly salary. If the borrower was to go in for a debt consolidation loan which offers him an interest of 8.5% p.a. for a tenure of 5 years, the borrower will be paying only an instalment amount of S$861.69, making repayments easier and more affordable. The figures shown are simplified for illustrative purposes and can vary depending on the interest rate offered by a bank for the DCP.
Currently the debt consolidation loan is only available for Singaporean citizens and Permanent Residents. It is not yet available for Foreign Nationals.
Most financial institutions that offer a debt consolidation loan will levy certain fees and charges against it. These are described below:
Like any other unsecured line of credit, a processing fee is charged. Some banks may offer a fixed minimum amount as a processing fee but depending on the total amount borrowed, the processing fee is usually 1% of the loan amount.
This fee is charged when the borrower pays off their DCP before the chosen tenure ends. The fee charged varies from institution to institution with most banks charging a certain percentage of the redemption amount as a fee.
Instalments that are not paid on time are subject to a late payment penalty. Again, this fee varies from bank to bank but is usually a fixed percentage of the overdue amount plus the current interest rate offered to the borrower.
Once you know what your goals and your options to pay your debts are, you need to know about the best option available for you. Hence, it is very important for you to understand the difference between debt consolidation and debt negotiation.
Both debt consolidation and debt negotiation have their advantages and disadvantages. Compared to debt consolidation, negotiation may seem advantageous, because it only involves negotiating your debts with creditors to avoid paying part of the money you have borrowed as it will be cancelled by the lender as bad debt.
For example, a customer applied for a personal loan from a bank to borrow $1,000. When the bank asks the customer to return the money he tells the bank that he can give them only $400 and requests them to forgive the remaining $600 as he does not have any source of income of additional funds to pay the remaining amount. At times, a creditor may accept such a request and ask the customer to only pay $400 and settle the loan as they are aware that it can cost them a lot of effort and sometimes money to recover the remaining $600. This process of negotiating debt and paying a smaller amount than required can be termed as debt negotiation.
Although debt negotiation may seem like a dream come true, it has many associated drawbacks:
You will not have to face the above mentioned problems when you opt for consolidating your debt instead of trying to negotiate lower payment amounts with the lenders. In fact, you will also be able to salvage your future chances of getting a loan or a credit card when you opt for consolidation instead of negotiation.
If you have outstanding debts to more than one creditor you should consolidate debts. If you think you have too much debt and that there is no way you can pay off your debts, then debt negotiation is the right solution for you as it will help you to avoid going bankrupt. However, it will take you years and maybe even decades to improve your credit score again. As long as you are aware that you will be able to make an instalment payment every month, you should opt for a consolidation loan and try to pay off your debts in the long run.
If you do not feel qualified to complete the process of consolidation of your debts on your own, you can hire the services of a specialized company that can offer you with the required assistance to consolidate your debt. Such a company can also assist you in applying for a debt consolidation loan.
There are times when you can easily complete the consolidation process on your own, for example, you can get a lower interest rate for transferring the balance from your multiple credit cards to a single credit card. It is called credit card balance transfer and it will allow you to enjoy paying a lower interest rate on your credit card debt. This process will also help you to consolidate your credit card debts and then make only a single payment every month. You can easily apply for the balance transfer facility on your own without seeking any professional help. But there are other situations that are more complicated and for which you may not feel qualified to consolidate your debts on your own.
If you do not feel qualified to do it yourself, you can hire a debt consolidation company.
The whole reason one would have to go in for a debt consolidation loan is because their current monthly payments are getting hard to keep up with. The reason this has gotten to a point where one needs a DCP to bail them out is they’re spending habits. Figuring out where their money is going is the key to reducing overall expenses. Impulsive shopping sprees using a credit card, excessive dining out, excessive swiping of the card, and unnecessary purchases all contribute to how much one ends up splurging. Changing the way they spend can help break the habit of racking up large outstanding balances and will mitigate the need of a DCP in the future.
Another great way to ensure spending doesn’t go out of hand is to set a budget and stick to it. Borrowers should set aside an adequate sum to cover their core expenses and not spend on anything that isn’t absolutely necessary. Instilling a sense of financial discipline can go a long way in ensuring their line of unsecured credit never goes too high.
When a borrower takes up a DCP, they should stick to the payments and not miss it. This is because not only will they have to pay a late payment fee but the fact that if they default on their DCP, they will have no access to any other form of credit to help them out.
Borrowers should look around and compare the various DCP’s available before settling on one. While a particular plan may advertise a lower rate of interest, it might offer a lower tenure or levy higher fees and charges. Borrowers must compare and weigh the benefits and shortcomings of each plan before deciding on the right bank.
When a borrower goes in for a DCP, all other lines of credit will be closed. Borrowers will however have access to a revolving line of credit that’s bundled in with their DCP account. This line of credit will have a credit limit equal to that of the monthly salary of the borrower. Borrowers should refrain from using this or use it only for an emergency because it will add to the monthly repayment and the whole point of a DCP is to consolidate payments into one affordable payment. Adding more to the existing payment would only make it harder to repay.
Debt Consolidation Plans do not allow borrowers to consolidate the following types of loans
The Monetary Authority of Singapore (MAS) introduced the Debt Consolidation Loan as a way to help Singaporeans and Permanent Residents to bring their credit under control. But the above mentioned loans have very specific uses and as such because of the need-based nature of these loans, MAS has exempted the inclusion of such loans across the industry. No bank or financial institution will provide a DCP for consolidating the above loans.
When a borrower goes in for a DCP, their Credit Bureau record will be updated with the code for ‘Debt Consolidation’. The DCP will act as another unsecured line of credit on the borrower’s record. The credit score will show that the borrower has gone in for the consolidation plan and might bring down their score but with consistent payments on their DCP, this should even out in time.
Borrowers should ensure that they make minimum payments on their credit lines till such a point where the DCP amount has been disbursed and the other lines of credit have been closed. This is to ensure that none of the lines of credit show that the borrower has missed a payment or that the line of credit is ‘past due’. If the borrower still has some outstanding amount in excess to that of the DCP amount, then they should settle this.
Q. What are the exclusions for a Debt Consolidation Plan (DCP)?
A. The DCP excludes any education loans, renovation loans, medical loans, loans granted for business purposes, and unpaid debts under joint accounts.
Q. Do I have to choose the 5% allowance on my DCP loan?
A. The 5% allowance is mandatory if you are taking a DCP loan for the very first time. This allowance takes care of any interest and fees you may incur from the date of approval to the disbursement of the borrowed amount to your FI (financial institutions).
Q. Am I allowed to partially consolidate my balances?
A. No, debt consolidation of your balances must be done in full with a participating FI.
Q. Can I make a transfer of the DCP loan amount to my current or savings account?
A. No, the DCP loan amount will be directed only to the FIs you have outstanding credit facilities with.
Q. Why do I have to take a revolving credit facility?
A. You will get a revolving credit facility automatically as it provides for a hassle-free method of payment to handle your daily requirements.
Q. Is this revolving credit facility mandatory?
A. The DCP and this facility are combined together to make one single product. But, you can choose ti not use this credit facility if you do not require it.
Q. Are there any annual fees and charges attached to this facility?
A. The revolving credit facility has annual fees and charges according to the designated FI’s terms and conditions. However, the annual fee may be waived as per the discretion of the respective bank or financial institution as long as it continues to be bundled with DCP.
Q. What is the limit on the revolving credit facility? Am I allowed to request for a lower limit?
A. The maximum limit on this facility is 1x your monthly salary. No, you cannot request for a lower limit.
Q. Can I request for a higher revolving credit facility along with the DCP if my salary increases?
A. Yes, you can request for a higher limit on this facility with the DCP amount if you submit your new salary documents.
Q. Am I allowed to cancel the revolving credit facility?
A. No, you cannot cancel as it is combined with your Debt Consolidation Loan account.
Q. Am I allowed to use my unsecured credit facilities if my DCP application is approved?
A. No, your credit facilities will either be suspended or closed once your application is approved. However, you can make use of your 1x revolving credit facility.
Q. Once my DCP is approved, do I have to suspend any existing GIRO or recurring arrangement?
A. Yes, once your loan is approved, you must terminate any existing GIRO or recurring payment arrangements on your credit facilities.
Q. What will happen if my DCP amount is unable to cover all my existing credit facilities?
A. You are solely responsible for paying any outstanding amount you owe to the respective FIs in case the approved loan amount does not cover all your existing debts. Should you fail to do so, the relevant FI will carry on their regular remedial process.
Q. Do I have to notify the existing FIs to suspend my accounts?
A. No, once your DCP loan is approved, the participating FI will automatically start paying your remaining balance with the existing financial institutions and inform them to suspend your accounts.
Q. What is a DC Registry?
A. DC Registry is a centralised registry that ensures customers do not have more than one active debt consolidation account at any time. The registry also makes sure that the borrower is not on multiple DCPs with multiple financial institutions.
Q. Will there be an impact on my Credit Bureau (CB) records if I apply for DCP?
A. Since DCP is considered as an unsecured credit product, your CB record will have the DC product code. The credit data will remain in your record for three years from the DCP closure.