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No matter how you got there, having debt that is out of control can be a very scary experience. Many young people have their first brush with debt when they start spending a lot on their credit cards and only pay the minimum sum each month. Older individuals may have had to take out personal loans to manage difficult life circumstances.
Although their situations may differ, Debt Consolidation Plans (DCPs) were introduced to help people who find themselves in these positions. A DCP is an unsecured loan offered by banks that allows you to pool all your debt together with one institution, instead of having them spread out. Here are a few ways a DCP might improve your debt problem.
It can be difficult to keep track of how much you have to pay and when, especially when you’re carrying debt from several financial institutions (FI). Sometimes, you may have more immediate daily needs such as groceries and bills to pay. In this situation, you may be able to make only one payment but not others.
A DCP combines them all into one payment, which minimises the chance of you missing a due date and incurring additional interest on your debt.
Interest rates for credit card debt can go up to around 25% p.a. In comparison, the Effective Interest Rates (EIR) of DCPs is much lower than that and range from 7% to around 11%. Do note that some of these rates are fixed while others could be higher or lower depending on your individual credit score.
If you’re still not sure if you should apply for a DCP, here’s an example to help you decide. Amy is a 28-year old Singaporean who earns a salary of S$4,000 per month. In the past few years, she has had to pay off a personal loan she took out for medical expenses. She also started racking up large credit card bills to cover her daily spending.
It became increasingly difficult for Amy to manage her finances. She started to miss payments, and after the compounding interest, she found herself S$50,000 in debt. If Amy takes out a DCP with HSBC, here is a rough estimation of how much she would save according to HSBC’s calculator.
|Amy’s current commitment (S$)
|Credit card||30,000 (25% interest)|
|Personal loan||20,000 (6% interest)|
|Total outstanding balance||50,000|
|Total monthly repayment||2,000|
|Total interest payable over 5 years||43,000*|
|Amy on HSBC’s DCP (S$)|
|DCP loan amount||52,500|
|Monthly repayment amount||1,077.12|
|Total interest payable over 5 years||12,127.07|
*HSBC’s calculator projected that she would have to pay S$8,600/year in interest. This amount is the yearly interest multiplied by 5 years.
To be eligible for a DCP in Singapore, you must fulfill the following criteria:
If you meet the criteria above, the next step is to approach any one of the 14 financial institutions in Singapore that offer DCPs and put in your application. These FIs will then evaluate you based on their own set of criteria which is likely to include your credit score and the size of your debt. Do keep in mind that like any loan, they can choose not to offer you a DCP if you don’t meet their requirements.
Before getting to that point, you have to decide which FIs you want to apply to. This can be difficult as all the banks offer slightly different packages.
|Bank||Processing fee||Rate type||Flat Rate*||Min. EIR||Tenure (years)|
|DBS||S$99||As low as||4.58%||8.22%||1-8|
|UOB||S$0||As low as||4.99%||9.04%||1-6|
|CIMB||1%||As low as||2.77%||7%||1-8|
|Maybank||S$0||As low as||4.7%||8.48%||1-10|
|HSBC||S$88 / 1% (waived)***||Guaranteed||4.7%-5.9%*||8.5%-10%*||1-10|
|Citibank||N/A||N/A||N/A||10.5%||Up to 7|
|ANZ||S$115||N/A||N/A||17.95%||Up to 7|
* A flat interest rate computes interest payments based on the initial principal amount
** There is a range of rates because they depend on the loan tenure
From the table above, the three best options would be HSBC, Standard Chartered, and OCBC as they have the lowest guaranteed flat rates and EIRs. HSBC comes in on top as it has a guaranteed EIR of 8.5% for tenures between 1-7 years. The other banks on the list which advertise their interest rates by saying “as low as” mean that you may be offered a higher rate if you don’t meet their criteria.
However, it would be prudent to apply to a few financial institutions to get their quotations so that you can make the best choice. In an ideal situation, you may manage to get one of the “as low as” rates. However, if their quotation is much higher than the guaranteed rates from other banks, you should probably look into one of those instead.
This should be your final consideration. You may want to go with a shorter tenure so that you can pay less interest, but you should first ensure that you can afford the monthly repayments. Even if the interest rates for the 8 year tenure is higher than the 5 year one, you may need the cash flow for daily expenses. If that’s the case, you should choose to go with the longer tenure so that your repayments fit comfortably into your budget.
Having debt is not the end, and there are tools you can use to improve your financial situation. If you are eligible to apply for a DCP, do look into one as soon as you can. If you don’t qualify but still have a significant amount of debt, you can approach Credit Counselling Singapore to seek their advice and get back on track.