Do you have a Debt Consolidation Plan (DCP) to your name? A DCP is definitely a way to mop up the outstanding debts and start afresh. It could even save you from the clutches of prospective bankruptcy. But, do you know that you could refinance your DCP loan with another financial institution if you wish to? Looking for a good reason? We’ll give it to you in the next section.
One good reason to refinance your existing DCP loan with a new lender could be to lower interest rates. If you are wondering why the rates vary from bank to bank, here’s the answer.
DCP loans offered by different banks are uniform in many respects. However, the banks still get to decide what interest rates or fees they want to apply, or the type of assessments they want to hold their customers to. That’s because a DCP loan is a commercial product. That gives individual banks the right to decide certain aspects of this debt management tool.
Let us now make an illustration to help you understand the potential savings you could be making through refinancing of an existing DCP loan with a new lender than offers a lower interest rate.
Let’s say that you were paying prevailing rates as high as 16% p.a. on your original DCP loan principal of S$25,000 with bank A. That means, your annual interest charges on this loan is S$4,000 (=16/100x25,000).
Let’s say that you’re now refinancing the loan with bank B. Let’s say that the new bank charges an EIR of 7% p.a. only. Therefore, your annual interest charges on this new loan will be S$1,750 (=7/100x25,000).
Therefore, you can save as much as S$2,250 (=4,000-1,750) or 56.25% (=2,250/4,000x100%) on interest payments every year if choose to refinance your DCP loan.
[Disclaimer: The numbers used in the example above are for illustrative purposes only. The method of calculation was simplified for easy understanding.]
Let us now see which banks you could refinance your existing DCP loan with.
Currently, 14 financial institutions that issue unsecured loans and credit cards, are authorised to offer DCP loans and DCP refinancing facilities. These banks are:
Before you choose a bank to refinance your existing DCP loan, spending some time on research is highly recommended. Try this page to get answers to your basic queries.
The answer in one word would be ‘no’. You’ll have to wait for at least 3 months from the time your original DCP application was approved. The original lender will also be at liberty to impose penalty charges for terminating the loan account prematurely. There is also no provision wherein you could consolidate the early repayment fee and accrued interest charges imposed by the original lender with the new DCP loan.
No. The outstanding debts will be refinanced by the new lender without any increase in the quantum of the loan. In fact, when you refinance an existing DCP loan, you won’t get the 5% additional allowance that you had got when you had applied for a DCP loan for the first time.
Before you can apply for a new DCP loan, you’ll need to obtain a settlement notice from your existing lender. The notice should clearly specify what the loan principal is and what the interest charges accrued till that point are. The new DCP loan amount would cover for the loan principal only. You’ll be liable to settle the outstanding interest charges and other fees levied by the original lender.
Ideally, you shouldn’t. Until the new lender has approved your loan refinancing application and disbursed the loan amount, you’ll be responsible for servicing the existing loan account and settling the dues. If you stop servicing the account before the new loan is approved, you could end up attracting higher interest charges and fees. The new lender won’t be liable for the additional charges that you may have incurred on your existing DCP loan.
Debt refinancing has obvious advantages. However, you’ll have to decide whether opting for refinancing will work in your best interest. Remember, to unlock true value, you’ll have to time your decision to refinance right.
If you’re really looking to reduce the size of your debt, managing to save more on interest payments could certainly be a step in the right direction. That’s where DCP refinancing could come in.