Have to pay multiple credit card bills? Check.
Struggling to pay the minimum amount on each card? Check.
Trying to figure out how to repay your personal loan? Check.
On the precipice of tumbling head first into debt? Check.
If you find yourself being able to relate to any or all of these situations, you are not alone. On an average, nearly 4,000 Singaporeans have debt that is at least 12 times greater than their monthly income. In such a situation, making multiple payments and on time is next to impossible.
A Debt Consolidation Plan (DCP) could be the answer to your money problems.
What Exactly Is a Debt Consolidation Plan?
A debt consolidation plan is a refinancing tool that is offered by financial institutions. Basically, with a DCP, you have the option of combining all of your unsecured credit (this includes payments to be made on multiple credit cards and loans) from multiple banks into single payment to be made to one participating financial institution. This means that instead of multiple interest rates to keep track of, you have only one interest rate to worry about.
Sounds great, right? But to be eligible for a DCP, you need to meet the following requirements:
- Be a Singaporean or Permanent Resident.
- Earn a minimum of S$20,000 p.a. and below S$120,000 p.a. and have net personal assets (your total assets less your liabilities) less than S$2 million.
- Have debt that is greater than 12 times your monthly income.
What Debt Can You Combine Under This?
As mentioned in the beginning, with a debt consolidation plan you can only combine or consolidate unsecured credit facilities. This includes:
- Credit cards
- Unsecured loans
You can’t, however, consolidate the following financial products:
- Debts under joint accounts
- Renovation loan or personal loan taken for renovation purposes
- Education loan
- Medical loan
- Credit granted to a business or for business reasons
How Is It Different from Consolidating Debt Through a Personal Loan?
You may have come across articles or even received advice from well-meaning friends and family about how a better way to pay off your debts is to take a personal loan. And while that is an option, you should keep in mind that when it comes to solving your money problems, you shouldn’t get carried away by what people tell you. You should only do what is right by your wallet!
To help you make this decision, here is a quick overview of DCP vs a personal loan.
|Debt Consolidation Plan||Personal Loan|
|Interest rate||Lower interest rate when compared to personal loans.
For example: DBS’ Debt Consolidation Plan’s interest rate starts from 7.23% p.a.
|Higher interest rate when compared to DCPs.
Example: DBS’ personal loan interest starts from 7.56% p.a.
|Winner: Debt Consolidation Plan|
|Tenure||The tenure depends on the financial institution, but in general, tenures can be up to 10 years.
Taking the example of DBS again, tenure is up to 8 years.
|Shorter tenures when compared to DCPs. Hence you will have to pay a higher amount each month in the form of instalment payments.
Using the same example, DBS’ personal loan tenure is up to 5 years.
|Winner: Debt Consolidation Plan|
|Eligibility||The eligibility criteria for a DCP is quite strict and necessitates your debt being greater than 12 times your monthly income.||Eligibility criteria for personal loans aren’t as restrictive as they are for DCPs. As long as you meet the age requirement and income-related requirements, you can apply for a personal loan.
Of course, your credit score will also be taken into consideration and a higher credit rating means that you stand a stronger chance of your application being approved.
|Winner: Personal Loan|
But what about a balance transfer?
You could just as easily combine your credit card debt into a credit card balance transfer and the debt on all of your personal loans into a personal loan balance transfer. In fact, balance transfers even provide you with interest-free periods up to 12 months. So, if you manage to pay your debts during this time, you only have to pay a one-time administration fee.
Why bother with the hassles of a debt consolidation plan, right?
Let’s use an example to better understand the pros and cons.
If you have credit card debt of S$10,000 and decide to take up DBS’ debt consolidation plan for 1 year, you end up paying interest of 7.23% p.a. This amounts to S$723.
With a balance transfer, you end up paying 5.20% p.a. (inclusive of the administrative fee). So, you pay S$520.
This sounds like a good deal. However, you should only consider this if you think you are able to pay off your debt within a year. If you aren’t able to, then the interest rate on your balance transfer changes to your credit card interest rate. So, if you have only been able to pay a quarter of your S$10,000 debt in the first year, you will end up paying around 25% p.a. to 30% p.a. on the remaining amount depending on your credit card. Essentially, you end up paying way more in terms of interest.
A good rule of thumb to follow is if you are sure that you can pay off your debt within the stipulated interest-free period (usually 12 months) then, by all means, take up a balance transfer.
If not, you are better off with a debt consolidation plan since the payments are spread over a period of time.
Now, How Is It Different From a DMP or DRS?
A Debt Management Programme (DMP) is a voluntary debt repayment plan where an arrangement is made between you and your creditors to repay your debt over a period of time. This programme is managed by Credit Counselling Singapore.
A Debt Repayment Scheme (DRS), on the other hand, is also known as a pre-bankruptcy scheme. Under this scheme, debtors with unsecured debt below S$100,000 enter into a repayment plan and avoid the stigma associated with bankruptcy.
Both these repayment schemes are only for serious debt problems.
Here’s how a DCP stacks up against DMP and DRS:
|Debt Consolidation Plan||Debt Management Programme||Debt Repayment Scheme|
|Repayment programme by||Association of Banks in Singapore||Credit Counselling Singapore||As per the Bankruptcy Act of the Ministry of Law|
|Debt amount||Exceeding 12 times your monthly income||No minimum amount, however, debtors have to attend sessions on money management as laid out by CCS||Below S$100,000|
|Effect on credit report||Credit report will include the DCP product code but is not on public record||Credit report will include the DMP product code but is not on public record||Your DRS status is on public record|
When Should You Consider a DCP?
Now that you have a fair understanding of whether or not a DCP is indeed the answer to all your money problems, here is an extensive (but not exhaustive) list of when you should consider applying for a debt consolidation plan:
- When you meet the eligibility criteria to apply for a DCP.
- When you are only making the minimum payment amount on your credit cards and personal loans.
- When you have fallen behind on the monthly payments on your debt and are struggling to make ends meet.
- When you are ready and willing to change your spending habits.
- As soon as you create a roadmap to be free of debt since a debt consolidation plan does not promise that you will be free of all debt.
So, if your loans have put you in a position where you always have money on your mind (or rather the lack of it), don’t let that get you down! Remember, there are solutions and a debt consolidation plan may just be the one for you!
This article was written by BankBazaar.sg.
BankBazaar.sg is a leading online marketplace in Singapore that helps consumers compare and apply for a credit card, personal loan, home loan, car loan and insurance.
A debt consolidation plan is a great way to manage your finances. Share with your friends if you think they could use a helping hand!
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