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.
Types of debts that can be eliminated by debt consolidation
Loans to consolidate debts usually are granted to pay any of the following debts:
- Credit card debts
- Medical debt
- Card debts granted by commercial entities
- Personal loans
- Student loans
- Bounced checks
- Home loans etc.
Debt Consolidation Loan - Questions to ask before signing the agreement
Before signing a loan to consolidate your debts you should make sure to have clear idea about the following:
Cost of the Loan - the fees charged should be low so that you can avoid paying a lot of money as fees.
Interest Rate of the Loan - interest charged with the loan usually will be lower than the interest rate your credit card. If the interest is very high you may no longer be able to make payments for the loan and so you should opt for a bank that offers such loan at a reduced rate of interest. Try to get fixed interest rate loan so that the monthly payment remains unchanged.
Loan instalments - the monthly instalment amount must be less than the sum of what you are paying now for separate instalment, in order to pay for all your debts.
Effect on your credit history - make sure that you get a fair idea of the impact that the loan will have on your credit history and credit score before you apply for it with the bank.
How does a Debt Consolidation Plan work
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 monthly payments will look like the table below:
|Type of Credit
|Credit card 1
|Credit card 2
|Credit card 3
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.
Features & Benefits of Debt Consolidation Loans
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.
You can merge all your debts into one - 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.
It will reduce the average interest rate on the total amount - 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.
It will reduce your monthly instalment payments - 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.
You will be able to become debt-free within a short period of time - 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.
It will improve your credit score - 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.
Tip: 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.
What is the difference between debt consolidation and debt negotiation?
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:
- It will be displayed in your financial history that you carried out a negotiation to come to a settlement agreement and that you did not pay all your debt.
- Although it is a better option than having to pay more money as debt, it can be very bad for you in the long run, because any future creditor will see that you have not paid the total amount of your debt in the past.
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.
When should you choose to consolidate your debt and when to negotiate?
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.
Seeking Professional Help For Debt Relief
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.
- A consultant will analyze your financial situation: number of unsecured loans (like credit card debt), number of secured loans (mortgages, car loans), the total amount of debt, interest rates, etc.
- The counselor who works for the consultant company will negotiate with your creditors to try to reduce the total amount of your debt.
- The counselor will also consolidate all your debts into one payment, so that you can avoid having to deal with several creditors.
- The counselor will talk with you to know about your budget and to help you in preparing a plan that will assist you to repay your consolidated debt according to your capabilities.
- Many debt consolidation companies offer free professional financial counseling.
Fees and Charges
Most financial institutions that offer a debt consolidation loan will levy certain fees and charges against it. These are described below:
Processing fee: 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.
Early repayment fee: 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.
Late payment 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.
Debt Consolidation Plan for Foreigners
Currently the debt consolidation loan is only available for Singaporean citizens and Permanent Residents. It is not yet available for Foreign Nationals.
Best Debt Consolidation Plans 2017
The list of banks offering Debt Consolidation Plans in Singapore are as follows:
HSBC Debt Consolidation Plan: The plan offers a tenure of up to 10 years with an EIR starting from 14.1% p.a. going up to 15.7% p.a.
UOB Debt Consolidation Plan: The plan has a tenure of up to 72 months with an EIR starting at 10.72% p.a.
DBS Debt Consolidation Plan: DBS offers a DCP with a tenure of up to 8 years and interest rates starting as low as 8.22% p.a. (EIR).
Maybank Debt Consolidation Plan: Maybank offers a DCP with a tenure of up to 10 years and interest rates starting as low as 8.48% p.a. (EIR).
OCBC Debt Consolidation Plan: The plan has a tenure of up to 8 years with an EIR starting at 10.46% p.a.
Citibank Debt Consolidation Plan: The plan has a tenure of up to 7 years with an EIR starting at 10.5% p.a.
Standard Chartered Debt Consolidation Plan: Standard Chartered offers a DCP with a tenure of up to 10 years and interest rates starting as low as 9.55% p.a. (EIR).
POSB Debt Consolidation Plan: POSB offers a DCP with a tenure of up to 8 years and interest rates starting as low as 8.22% p.a. (EIR).
CIMB Debt Consolidation Plan: The plan has a tenure of up to 8 years with an EIR starting at 7% p.a.
BOC Debt Consolidation Plan: The plan offers a tenure of up to 10 years and borrowers will also get a complimentary BOC credit card.
Dos and Don’ts of a DCP
Do change the spending patterns: 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.
Do set a budget and stick to it: 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.
Don’t miss payments: 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.
Don’t settle on the first DCP you find: 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.
Do use caution with the revolving line of credit: 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.
What is not covered by a DCP
Debt Consolidation Plans do not allow borrowers to consolidate the following types of loans
- Car loan
- Education loan
- Home loan
- Renovation loan
- Business loan or grant
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.
Credit Score and DCP
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.
- How much can one borrow with a DCP?
The amount that one can get from a DCP will be equal to the total outstanding balance of all unsecured lines of credit of the borrower plus an additional 5% allowance over the total DCP amount.
- What is the allowance given for?
The additional 5% allowance is provided to act as a buffer against any incidental charges such as interest or fees. The allowance is meant to act as buffer between the time the DCP is approved till the time the amount has been disbursed.
- Can the borrower make use of the allowance amount?
No. neither the allowance nor the DCP amount will be credited to a borrower’s savings or current account. The amount is disbursed directly to the financial institution with which the borrower has an outstanding unsecured credit facility.
- Is the allowance amount applicable on every DCP taken?
No the allowance is only offered as a mandatory service on the first DCP taken up by the borrower and will not be provided for any subsequent refinanced DCP loans.
- Can the credit limit on the revolving line of credit be increased?
The revolving line of credit is bundled together with the DCP account. While the credit limit is fixed at 1X of the borrower’s monthly salary, the only time it can be increased is if the monthly salary of the borrower increases. The borrower will have to submit fresh income documents as proof to have the limit increased.
- What happens to the unsecured credit facilities once the DCP has been approved?
Upon approval of the DCP, the borrower's’ outstanding unsecured lines of credit will be closed. To manage with daily needs or other essentials, the borrower can make use of the revolving line of credit bundled with the DCP account.
- What happens when the DCP amount is not enough to clear the outstanding unsecured credit balance?
If the approved DCP amount cannot fully clear the outstanding unsecured credit balances, then the borrower is responsible for clearing out the balance of the unsecured credit lines directly with the respective financial institution.