So, you think that loans are actually a necessary part of modern life? We won’t contest you on that. Probably, you’re right! However, have you ever wondered what the ramifications of unchecked borrowing could be for your post-retirement life? If you haven’t, let’s draw a picture for you.
How Unsettled Debt Amassed Today Can Wreak Havoc in Your Life After You Retire
Data shows that the average Singaporean likes to borrow money. We’ll revisit this topic later in the article. While borrowing isn’t unhealthy per se, keeping too many credit lines open for long, can result in a mountain of debt. That’s because, over time, interest compounding would mean that your debts would grow bigger at a much faster rate.
If you have a massive debt by the time you retire, here are some of the consequences that you might face:
- You’ll have to worry about money problems when you ought to be relaxing instead.
- You may not be granted additional loans because you won’t have an income.
- If you don’t have a substantial CPF saving, you won’t have much to fight the situation with.
- You might get dangerously close to bankruptcy.
- You might lose your home and other valuable assets if a lender decides to pursue the legal route.
- Even registered moneylenders may refuse to grant you fresh lines of credit. Alternatively, you may have to pay high interest rates. That’s going to be counterproductive when you’re trying to reduce the size of your debt burden.
The Singapore government in association with certain participating financial institutions offers you a way out. A debt consolidation plan (DCP) is a form of personal loan. But, as opposed to regular loans that offer you liquidity, a DCP can help you reduce the size of your debt. Lower interest charges and closure of existing accounts mean that you’ll have to pay just one affordable monthly instalment.
Why Should You Apply for a Debt Consolidation Programme Before It’s Too Late?
You can apply for a DCP if the size of your debt is at least 12 times your monthly income. This probably means that you have accumulated considerable cumulative outstanding debts across multiple banks.
Debt snowball or avalanche methods may work effectively when the size of your debt is still relatively small. However, large debts with high interest charges should be settled as quickly as possible. It is best if you can just pay them off at one go.
A DCP can be extremely advantageous for those who don’t possess other means to pay off debts in one shot.
Once a DCP loan is granted, all your existing credit facilities will be closed at one shot. While the size of your debt would remain the same, lower interest rates would mean that you can save appreciably more on interest payments and hence improve your chances of becoming debt-free. The quicker you get this loan, the more money you will be able to save.
On an average, you may have to pay effective interest rates of, say, around 25% p.a. on your credit card debt. Lenders can charge effective interest rates between 11% p.a. and 15% p.a. on personal loans. Now compare this to an HSBC DCP loan. You’ll enjoy flat rates of interest as low as 4% p.a. and effective rates of interest as low as 7.5% p.a.
This could mean that you won’t have to push around a big debt even after retirement. You can, instead, focus on your hobbies and your life just the way you want.
Let Us Illustrate:
Let us assume that your monthly income is S$3,000 and the size of your debt is S$45,000 (15 times your monthly income). The debt can be split into three components – each is owed to a different lender.
Say, you have a debt of S$5,000 with Citi, S$15,000 with American Express, and S$25,000 BOC. Let us also assume that your current monthly instalment payments with Citi, Amex, and BOC are S$200, S$500, and S $800, respectively. This means that your cumulative loan liability per month is S$1,500 (=200+500+800).
With Citi DCP, you can bring down your monthly payments to S$758.73. This is based on the assumption that the tenure chosen is 7 years. Therefore, you’re saving S$741.27 (=1,500-758.73) per month. That amounts to a savings of 49.418% every month. Don’t you think it’s an extremely convenient way to pay off your debts?
1. The numbers used in this example are for illustrative purposes only.
2. We have used the DCP calculator available on Citi’s official website for this example.]
Does Debt Consolidation Mean Austerity?
It depends on how you look at it. True, that throughout the tenure of the loan, you won’t be able to apply for other loans. You’ll have to make do with the mandatory revolving credit that you’ll be offered.
That means that you’ll have to put a leash on your monthly spends and closely monitor your cash flow. This could be equated by some to austerity and struggle. However, you’ll be debt-free without having to declare yourself as a bankrupt. You won’t even have to sell your assets. Now, don’t you think that sounds like a good deal?
What you should be a little concerned about, however, is that DCP records will stay on your credit bureau report for 3 years after account closure. The upside is that lenders won’t pester you for payments and you won’t have to worry about legal proceedings for the rest of your life (provided you don’t rack up a big debt again).
Some Hard Facts That Show How Too Many Loans Can Lead to Trouble in Your Paradise
A BankBazaar survey conducted a few months back had revealed that almost 33% of Singaporeans currently have a loan or had one in the past. Another survey authorised by us had shown that 23% of the population owns 5 or more credit cards and 50% have 1 to 2 cards.
Now, you must be wondering what’s so worrying about these statistics. Don’t forget that you probably have a mortgage loan and/or a car loan. A home loan can easily run up to 25 years or even 30 years. This, combined with other debts related to credit cards, other unsecured loans, secured loans, and more, can put you in a spot of bother.
If you can at least pay down your interest-bearing unsecured debts with a DCP loan, paying off the outstanding balance on your secured loans such as mortgage loans can be easier. That’s because interest rates on secured loans are usually much lower. This way, whether you retire aged 55 years or 65 years, you can hope to start your post-retirement life with a clean slate on the debt front.
A Credit Suisse report in 2017 had shown that the average household debt in Singapore is US$50,570, moderate when compared to other high-income countries. However, an MAS report in 2017 had shown that household debt had grown at 3.3% year-on-year in Q3 2017. This was mainly driven by property loans.
Even though in terms of the wealth-per-adult index, Singapore continues to be in a stable position, the fact that many in Singapore struggle with high debt problems is also true.
The following data can buttress this argument.
According to an article published on this CPF Board website, until March this year, there were 32,000 borrowers with unpaid interest-bearing debt (unsecured) exceeding 18 times their monthly income. The total value of these debts stood at S$4 billion. Such lenders formed 2% of the total number of people who borrowed unsecured credit in Singapore.
While in absolute terms, the number of such borrowers is down from 51,000 in February 2015, it still remains an area of concern.
The government plans to bring down the maximum interest-bearing unsecured debt from 18 times to 12 times one’s monthly income by June 2019. This shows how seriously the government views the situation of high debt-to-income ratios.
If you think that your debt situation requires immediate intervention, don’t hesitate to equip yourself with a DCP loan.
The government has introduced the debt consolidation programme to discourage you against over-reliance on credit. Why spend your retired life worrying about how you’re going to pay off your debts? Apply for a DCP instead and get the peace of mind you need after a lifetime of hard work.