Sometimes you can find yourself paying various high-interest debts and find it difficult to keep up with the payments every month.
If you’re not careful, you may miss making several payments, which will negatively impact your credit score.
In such a situation, you can consider getting a debt consolidation loan. Loans for consolidating debt can help you manage such situations as they allow you to combine all your debts into a single loan.
But the first step lies in knowing how does debt consolidation loan work, which this article will explain.
What Is A Debt Consolidation Loan?
A debt consolidation loan is specifically designed to help those with many debts pay off their existing credit owed by offering them a new plan.
With debt consolidation, you can combines all credit card and personal unsecured loans into one single loan and save on interest.
It’s worth noting that a debt consolidation loan is not the same as a debt consolidation plan (DCP). Debt consolidation loans are available from licensed money lenders, but a DCP is only offered by certain financial institutions such as banks.
You can take a debt consolidation plan if you find it difficult to manage payments for high-interest unsecured debts. The DCP was introduced to help Singapore citizens and permanent residents manage payment for a debt. Foreigners are not eligible for a DCP.
If the total amount you owe on loans is more than 12 times your monthly earnings, a debt consolidation plan is recommended.
If you have a smaller debt, you can sign up for a bank transfer or a personal installment loan.
How Does A Debt Consolidation Plan (DCP) Work?
Let’s use an example. Suppose you earn a monthly salary of $2,900. Your debt balance on three credit cards from different banks and a personal loan is $40,000.
|Outstanding Balance||Interest Rate||Minimum Payment|
|Credit Card 1||$15,000||26%||$450|
|Credit Card 2||$10,500||25%||$315|
|Credit Card 3||$8,000||25.95%||$240|
|Personal Installment Loan||$6,500||11.32%||$270|
As you can see, the minimum monthly payment for all these debts amounts to $1,275 – almost half of your monthly salary. You’ll find it difficult to keep up with paying.
Also, the outstanding balance is more than 12 times the monthly salary. This means you can qualify for a debt consolidation plan.
The interest rate paid in this scenario is $9,336 per annum. Credit card interest rate compounds on the remaining balance, so the amount of debt here can take you more than a decade to clear.
With a debt consolidation plan, you can combine all these unsecured loans to avoid making multiple payments every month. The bank with which you take the consolidated plan buys out all the other debts with their interests and fees. The accounts will be closed or suspended temporarily.
You will then make one single monthly payment to the bank providing the DCP until you fully clear the debt.
Assume you take a consolidated loan at 3.4% per annum, payable for eight years. The payments you make will be:
For The Existing Debts
- Outstanding balance = $40,000
- Various interest rates are as follows:
- 26% per annum
- 25% per annum
- 25.95% per annum
- 11.32% per annum
- Monthly repayment: $1,275
- Total interest paid in one year: $9,337
- Total interest paid in eight years: $74,964
For The Debt Consolidation Plan
- Total outstanding balance: $42,000 (including fees and 5% allowance)
- Interest rate: 3.4% per annum (effective interest rate from 6.5% per annum)
- Total monthly repayment: $562
- Total interest payable over one year: $1,497
- Total interest payable over eight years: $11,973
As you can see, a debt management plan in Singapore can save you a lot of money on interest.
How To Use A Debt Consolidation Calculator
The lending institution offering debt consolidation usually has similar loan products with tenures ranging from one to 10 years.
The effective interest rate (EIR) is calculated based on the loan term and your financial needs. Some lenders may charge processing fees, but you must also check for the minimum and maximum loan tenure.
Your credit score, citizenship status, loan amount, income level, and the period you pay the loan determine the interest rates you’ll be charged.
Many lenders have a debt consolidation plan calculator to help you with the calculation. You only have to enter the variables as required – the balance, interest rate, and current monthly payments.
The calculator shows you when you’ll be debt-free based on the values you have entered. You’ll see the available debt consolidation options based on your credit score range. Check the comparison between the consolidation plan and your current debts.
In most cases, the new total payment should be less than your current total payments, saving you money on interest.
How Much Can You Borrow?
The amount you can borrow will depend on the amount of debt you have, as well as your income and other financial details.
The debt consolidation plan money lender will also consider your credit score, which is derived from your loans and payment history. Any lender would want to be sure that you can repay the loan.
Many lenders will offer a consolidation loan amount equal to your total outstanding balances plus any other charges or fees on the debts.
But sometimes, the amount approved by the lender may not be enough to repay your entire outstanding debt balance. If this happens, you will need to pay the outstanding balance directly to your lenders.
In many cases, the amount you can borrow with debt consolidation is six times your monthly income, up to $50,000. The lender will look at your case on an individual basis if you need a higher loan amount.
You will also get a 5% additional allowance on your first consolidation loan. This amount will help you settle any incidental charges incurred between the approval time of your DCP and when you receive the funds.
Qualifying Criteria For A DCP
Several factors influence a lender’s decision to approve you for debt consolidation. To qualify for debt consolidation in Singapore, you must meet the following eligibility criteria:
You must be a Singaporean or permanent resident.
Your annual income must range between $20,000 to $120,000. Your total personal assets should also be not more than $2 million.
Applying for a debt consolidation plan requires that you be deep in debt. The total due balance must be at least 12 times your monthly earnings.
The law only allows you to apply for one consolidated debt plan at a time. But you can refinance it after three months if you find another bank charging lower interest.
Where To Apply For A Debt Consolidation Loan
Several banking institutions provide consolidate debt loans. You can apply to any of them, regardless of whether you bank with them.
The financial institutions providing debt consolidation in Singapore include the following:
- United Overseas Bank Limited
- Maybank Singapore Limited
- CIMB Bank Berhad
- American Express International, Inc.
- Diners Club Singapore Pte Ltd
- Industrial and Commercial Bank of China Limited
- Bank of China Limited (Singapore)
- RHB Bank Berhad
- DBS/POSB Bank Ltd
- HSBC Bank (Singapore) Limited
- Oversea-Chinese Banking Corporation Limited
- Citibank Singapore Limited
- Standard Chartered Bank (Singapore) Limited
- HL Bank
Every institution has its terms and conditions, requirements, and rates, so before settling for a particular plan, compare different offerings from different banks.
Doing a careful comparison can help you save on interest and monthly payments.
Alternatives To Loan Consolidation In Singapore
If you don’t qualify for a debt consolidation plan in Singapore, you can apply for a personal loan and use it to repay your existing high-interest loans.
The best way to approach it is by comparing what different lenders offer.
Paying off debt requires discipline. You could be tempted to use the money on other demands, but that will complicate your financial life even more. You should use the money from the personal loan to pay your high-interest loans.
Make sure you repay the personal loan monthly. It can help improve your credit score and set you up for financial stability.
Consolidate Your Loan In Singapore
Loan consolidation will help you save money by combining interest-bearing loans into one plan with low-interest charges.
Consider consolidating debt if you have multiple loans from different financial institutions like CreditMaster.
We are a reliable licensed money lender in Singapore, offering some of the most affordable interest rates and no hidden fees.
Reach out to us now or apply for a loan today.