These debt repayment plans can help Singaporeans enjoy true abundance and fortune in the Year of the Rooster.
No one likes to think about “unlucky” things like debt, but ignoring the problem only makes it worse. Now that we are well into the Year of the Rooster, it’s a good time to make a serious effort clearing your debts. With the right mindset and a concrete plan, this year may yet turn out to be an auspicious one for you.
There are two aspects to successfully managing debt. The first is keeping up with the payments as they become due. This is to avoid incurring penalty fees and other charges, which will enlarge your debt and degrade your credit rating.
The second is to reduce your interest. As compound interest can make even a small amount grow into a lump sum that is painful to bear.
Debt Repayment Tools in Singapore
The modern banking system is designed to help consumers use money in a convenient and responsible manner. After all, the flow of credit keeps our economy running properly.
To that end, financial institutions - private and regulatory - put in place various measures to help control consumer debt. You can avail yourself of several options to help manage your debt. This not only improves your financial standing, it also helps you enjoy a better quality of life.
Make a promise to get your debts under control this Year of the Rooster. Here are 3 useful debt repayment tools that can help you out.
Use a Debt Consolidation Plan to Repay Multiple Unsecured Debts
You may have heard about a Debt Consolidation Plan (DCP), which is the latest tool launched by the finance industry to help manage consumer debt.
In simple terms, a DCP works by buying over all your existing debts, relieving you of the liability to pay off all your creditors. In exchange, you pay the total amount owed to the DCP provider over an agreed period of time.
The advantage of a DCP is that it simplifies your debt repayment process, and makes it more affordable for you to pay off your debts.
Firstly, with a DCP, you no longer have to make multiple payments each month in order to keep your accounts current. You simply have to take note of one payment to be made each month.
Next, a DCP is usually offered at an interest rate lower than credit cards, but may be higher than some personal loans - so you do not have to juggle your payments according to different interest rates.
For example, HSBC's Debt Consolidation Plan is offered at a flat interest of 4.7% p.a. (equivalent to EIR of 8.5% p.a.) for plans lasting between 1 to 7 years. For 8 to 10 years, the interest is 5.9% p.a. (equivalent to 10% p.a.) This is much lower than the average interest rate of 24% p.a. to 25% p.a. of credit cards.
Thirdly, if you have outstanding balances on multiple credit cards, all the separate minimum payments can quickly add up. This eats into your cash flow, and deprives you of the ability to save money for emergencies. Which then exposes you to the risk of having to draw on more credit - and getting deeper in debt.
Here, a DCP helps by spreading out your debt payment over a fixed period and usually at a lower interest rate. This can lower your monthly payment amount, freeing up your cashflow and allowing you to fulfil other crucial financial goals (like saving an emergency fund) while still paying off your debt.
HSBC has a handy calculator that lets you see how its DCP can help you. Let's say you have a total outstanding debt of S$35,000, and your minimum payment per month is S$1,050 (ie. 3% of outstanding debt).
With a DCP 5-year plan, you'll only need to pay about S$720 per month, which means you'll still have S$330 in spare cash to meet other financial needs. This is extremely helpful in helping you avoid getting into a poverty trap, while still fully servicing your debt.
There are many advantages of a DCP, and these are reserved for those who need them the most. If you find yourself oweing more than 12 months your salary in unsecured credit (credit cards, personal loans and overdrafts), consider applying for a debt consolidation plan.
Not only can a DCP make it less stressful for you to manage your debt, you will also be prevented from taking on more debt. In case you think a DCP is too restrictive, know that DCP users will be allowed credit of 1 month’s salary to help with daily needs.
Use Personal Loans to Lower Interest Rates
Maybe your debts aren’t quite large enough to qualify for a DCP, but you find yourself struggling to keep up with your payments. Maybe you’ve been missing payments and racking up late fees because your salary isn’t coming in fast enough.
In that case, a personal loan may be the ideal solution for you.
Add up all your outstanding balances to know what’s your total debt. Next, take out a personal loan for the total amount and pay off all your credit cards.
Then, all you need to do is to service the monthly payments from the personal loan. Keep up with your payments for the agreed duration, and you’ll soon be free of debt.
The advantage of using a personal loan this way is that you’ll be lowering your overall interest payment. Credit cards have interest rates of about 2% per month (or around 25% per annum). In contrast, personal loans have lower interest rates, with some going as low as 8.5% per annum.
Some caveats: you can only take out a personal loan for up to 4 times your monthly salary. Your loan tenor is also fixed, and there’s a monthly payment you’ll have to make each month. If you decide to pay off your loan early, you will be subject to an early repayment fee.
Before applying for a personal loan, make sure to find out the duration of the loan, the monthly payment amount, and any other fees like processing fees or early termination charges.
Work out your sums to see if a personal loan fits into your cashflow, and only proceed if it does.
Use Balance Transfers to Stave off Interest Charges
Let’s say you had to put a few thousand dollars on your credit card, such as paying for a medical emergency, or to quickly replace broken down electronics or equipment.
You don’t have enough savings to pay off the entire bill this month. However, you could probably pay off the amount over the next several months. You resolve to clear your outstanding debt as quickly as possible. If this is your situation, consider using a balance transfer to save yourself from paying interest on your credit bill.
A balance transfer offers you a loan with an interest-free period - typically from 3 months to 12 months. If you pay back the loan within this period, you won’t have to pay any interest charges.
There will be an upfront processing fee attached to your balance transfer, but it’s still far cheaper than the interest on your credit card balance. Do note that your balance transfer will also need to be serviced with monthly payments, or you’ll incur interest or finance charges.
Before applying for a balance transfer, find out how much the processing fees are. Ask about the monthly repayment amount, and remember to add that payment to your monthly bills.
Clear Debt Today for a More Auspicious Tomorrow
Everyone approaches the new lunar year with a renewed sense of hope and optimism, and we all wish for more money and a healthier bank account. Rather than subjecting ourselves to the vagaries of fate, wouldn’t it be better to take control of our finances by working on what we can?
Debt management is an acquired skill, but with the right attitude, knowledge and product, you can pay down your outstanding balances and eventually get out of debt.
For the rest of the year, set a goal for clearing your debt and you’ll be enjoying true abundance and fortune by 2018.
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By Alevin Chan
A Certified Financial Planner with a curiosity about what makes people tick, Alevin's mission is to help readers understand the psychology of money. He's also on an ongoing quest to optimise happiness and enjoyment in his life.