To meet your financial objectives, sometimes borrowing becomes essential. For all its benefits, borrowing always has a downside. The downside is debt accumulation. If not nipped in the bud, a debt molehill can turn into a mountain in no time and with disastrous effects. Balance transfers (BTs) can make life much easier under such circumstances. The following section will offer you an in-depth explanation. Let’s see.
Here’s how you could have accrued debt:
While personal loans (term loans and lines of credit) offer you liquidity when you lack it, balance transfers are suitable for debt reduction. Lenders usually charge 0% p.a. interest on their balance transfer facilities. So, if you transfer outstanding balances from multiple cards or credit lines to a single card or loan account charging 0% interest, you’ll actually get to repay the debt and at lower interest costs.
A balance transfer loan isn’t a free pass to debt freedom. Most lenders will charge a one-time handling fee. Also, if you fail to repay the dues in full within the loan tenure, higher rates of interest (usually prevailing interest rates) can become applicable. Therefore, the only way to benefit from a BT facility is by repaying your outstanding balances on time. Also, the principal debt amount remains unchanged even after you apply for a balance transfer facility and will have to be repaid in full.
The most popular tenures offered by issuers of balance transfers in Singapore are:
The following are the most important features that you may get on a BT facility:
High Borrowing Limit: Most lenders may impose a limit on the balance transfer amount. For example, with DBS/POSB Balance Transfer, you may be able to transfer balances equivalent to 93% of the credit limit available on your POSB/DBS card or DBS Cashline account. With HSBC’s Personal Line of Credit Balance Transfer, you can borrow up to 90% of the credit limit on your card.
Minimum Borrowing Limit: Some lenders may also impose a lower limit on the loan amount. For example, a BT application for a loan less than S$500 may not be accepted, if you opt for DBS/POSB Balance Transfer. You can transfer as little as S$1,000 with HSBC’s Personal Line of Credit Balance Transfer.
Higher Interest Savings: Most lenders offer an introductory period of 0% interest on balance transfers. That means that as long as you can repay the dues within that period, no additional interest will accrue on your borrowing. Hence, the cost of borrowing could be significantly lower than your existing credit facilities, even though the principal debt amount remains unchanged.
Faster Debt Repayment: Since the entire monthly payment will be used for paying down the principal debt amount (0% applied interest rate), chances of becoming free of debt within a short period of time is much higher. That is, however, assuming that you make full monthly payments during the introductory period of the BT loan.
Single Payment Every Month: Multiple credit card or line of credit payments can not only lead to higher interest charges but can also be inconvenient. Remembering all the separate due dates is a challenge by itself. This is true even if you’re using spreadsheets and reminder alerts to reduce chances of missing timely payments. With a balance transfer to a single credit facility, you’ll have to make one payment every month.
Attractive Promotional Offers: Many lenders offer limited-period deals with their BT loans. While some lenders offer freebies like cashback, others can waive the one-time processing fee, otherwise applicable.
Positive Impact on Your Credit Score: Applying for a balance transfer loan can have a positive impact on your credit score. That’s because the reason you’re applying for a BT loan is probably because you have exhausted the credit limit on your existing credit facilities or at least breached the comfort level of 30% of credit utilisation. So now, you may be having difficulties keeping up with multiple payments with high interest rates. If you then opt for a new card that offers a higher credit limit than your cumulative outstanding debts, your utilisation ratio can stabilise once again. This is because you will have a single payment to keep up with at significantly lower interest rates.
Also, since a balance transfer facility can reduce your debt burden by helping you pay off outstanding debts faster, it can have a positive impact on your credit report. This is, however, based on the assumption that full payments are made on time and within the promotional interest period.
Currently, the following balance transfer facilities are available in Singapore:
|Name of BT Loan<||Applied Interest Rate||Effective Interest Rate||Administrative Charge||Minimum Monthly Payment||Tenures Available|
|HSBC’s Personal Line of Credit Balance Transfer||0% p.a. for 6-month tenure and 4.88% p.a. for 12-month tenure||Between 2.17% p.a. and 4.88% p.a.||Between 0% and 1.38%||3% of the outstanding dues||6 and 12 months|
|DBS Balance Transfer||0% p.a.||Between 5.06% p.a. and 5.34% p.a. (Cashline and credit card)||Between 2.5% and 6.38%||2.5% for DBS Cashline and 3% for DBS/POSB Card||6 and 12 months|
|UOB Funds Transfer||0% p.a.||Between 3.92% p.a. and 5.20% p.a. (Includes both UOB cards and CashPlus)||Between 2.5% and 4.88%||2.5% ( minimum S$30) for CashPlus and 3% (minimum S$50) for UOB cards.||6, 12, and 18 months|
|OCBC Balance Transfer||0% p.a.||Between 5.20% p.a. and 7.38% p.a.||Between 1.80% and 4.50%||3% of the balance (minimum S$50)||3, 6, and 12 months|
|Citi Balance Transfer||0% p.a.||Between 3.60% p.a. and 7.87% p.a. (considering both new and existing customers)||Between 1.58% and 5.50% (considering new and existing customers)||1% of the transfer amount (minimum S$50) for Citi cards and 3% of the transfer amount (minimum S$45) for Ready Credit||3, 6 and 12 months (considering both new and existing customers)|
Let us consider an example to see how much you can really save. Let us assume that your annual income is between S$20,000 and S$30,000. Let us also assume that you have taken an OCBC ExtraCash Loan of S$20,000 for 1 year. The processing fee is S$100 and the applied interest rate is 12.31% p.a.
Your monthly instalment in that case would be around S$1,871 [=20,000/12+12.31*19,900/100/12].
Let us now assume that you have chosen OCBC Balance Transfer for 1 year to settle your loan dues of S$20,000. A processing fee of 4.5% and an applied interest rate of 0% p.a. would apply. The upfront processing fee would be S$900 (=4.5/100x20,000). The applied interest rate of 0% p.a. would be levied on the balance i.e. S$19,100 (=20,000-900). Your monthly instalment payment amount would be approximately S$1,667 (=20,000/12+0/100*19,100/12).
So, you can actually save up to 11% [= (1,871-1,667)/1,871x100] every month in this case.
[Disclaimer: The results depicted here are purely for illustrative purposes and may bear no resemblance to actual results.]
The above example doesn’t consider late payment fees and default interest charges. So, if you have started to max out your existing credit lines or if you’re attracting higher charges every month, your savings could be even higher if you choose to transfer the outstanding balances to a BT loan account.
The following are the fees that you might have to deal with:
For someone struggling with high interest charges, and missed deadlines on their card and personal loan payments, a balance transfer loan can be a godsend. However, it never hurts to be careful. Hence, take some time to ponder over the following points before you think about applying for a BT loan:
A balance transfer loan can help your credit score provided you make full settlement during the interest-free period. It can have a positive impact on your credit score only if you turn debt-free.
However, if you carry a balance on your BT loan account even after the end of the introductory period (i.e. when prevailing rates become applicable), your score can be negatively impacted. This will be if you can’t keep up with the payments (miss payments, make late payments, etc.). This will also be true if you open too many BT loan accounts after the introductory period elapses on your current account. That’s because every single loan application will result in a hard inquiry.
The primary objective of a balance transfer credit facility is to reduce debt. However, the only way to do it is to pay it down within a short timeframe. If you get tempted to make only the minimum payment, you may never be able to extract yourself out of the debt trap. Don’t forget to factor in the compound interest charges that would come in after the introductory period.
If you have transferred debt to a balance transfer card, know that a 0% p.a. flat rate of interest may not apply to new purchases. Other regular fees and charges may apply, too. Most card issuers also offer no reward for transactions related to balance transfers.
While you can enjoy an interest-free payment period with this loan, it goes without saying that if you fall behind the repayment schedule, not only will prevailing interest rates become applicable but also penalty charges such as late fees may also come into effect. Don’t get so cosy with the low applied interest rate on your loan that you forget your end goal of becoming debt-free.
The one-time processing fee on a balance transfer facility could go up to 5% and beyond. Although it’s a one-time fee, it is higher compared to processing fees on comparable debt tools. In addition, the card or line of credit to which you consolidate your existing debts, can also attract annual fees. These can jack up your cost of borrowing considerably.
Banks such as Citi may not allow you to use its balance transfer facility to repay dues on any other existing unsecured Citi loan account that you may possess. This is a common practice across many other banks in Singapore.
Most banks offer the following channels of application:
[Disclaimer: Not all the aforementioned options may be offered by certain banks. Do check with them or check our balance-transfer product pages for more information.]
From what you have read so far, you may have already realised that balance transfer offers some unique benefits. It can be a great option to reduce the weight of your unsecured debts.However, this is true only for someone who is confident of being able to repay the dues in full during the interest-free period. Also, you may need a decent credit score to be eligible. If it isn’t up to the mark, lenders may not offer you an interest-free loan. This means that there are some areas of concern. You have to be careful while handling this category of personal loans.However, if you can truly optimise the effect of a balance transfer facility, think of the benefits. Here are a few positive outcomes that you could be looking at:
You can actually get a second or even a third chance with a balance transfer loan. Try not to blow it. It can solve your immediate cash flow concerns and help anchor your long-term financial objectives.