Debt Consolidation Plan: What Is It And How Does It Work? | SingSaver

What is a Debt Consolidation Plan And How Does it Work In Singapore?

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Here’s everything you need to know about debt consolidation plans in Singapore and how it can help you pay off multiple unsecured debts.

It’s tough keeping up with overdue payments on a single credit card, but it gets even worse when you’ve fallen deeply in debt with several creditors. There are too many due dates and payments to keep track of, and the steady stream of reminders about your outstanding balance only adds more stress. The more you fall behind, the larger your debt becomes.

Under these circumstances, debt consolidation plans can help.

What is a Debt Consolidation Plan?

A Debt Consolidation Plan (DCP) is a debt management tool that allows you to combine all existing credit card debts and personal loans into a single loan with a lower interest rate. The loan is then repaid in automatic monthly payments, much like a personal instalment loan, for a period of up to 10 years.

The DCP was announced by the Association of Banks in Singapore (ABS) in 2017, and is designed specifically for Singaporeans and Permanent Residents who are juggling several high-interest unsecured debts and have difficulty meeting payments.

A DCP is usually recommended only if you have an outstanding debt that is more than 12 times your monthly salary. For smaller debt amounts, a balance transfer or personal instalment loan may be better alternatives.

How does a Debt Consolidation Plan work?

Let’s take the example of Jonathan, who has a monthly salary of S$3,000 and a current outstanding balance of S$40,000 between 1 personal loan and 3 credit cards from different banks.

 Outstanding Balance Interest Rate Minimum Payment
Credit Card 1S$15,00026% p.a.S$450
Credit Card 2S$10,50025% p.a.S$315
Credit Card 3S$8,00025.95% p.a.S$240
Personal Instalment Loan (24 months)S$6,50011.32% p.a.S$270

Jonathan is barely keeping up with the minimum payment of S$1,275 a month – nearly half his monthly salary. His total outstanding balance is also more than 12 times his monthly salary.

At this rate, he is paying around S$9,336 in interest alone per year. Because the interest rate on credit card debt compounds on the remaining balance, it will take him over a decade until he clears his debts completely.

A debt consolidation plan can combine all these unsecured loans into a single loan. Essentially, the bank providing the DCP will buy out Jonathan’s outstanding balances, fees, and charges payable from his credit cards and loans – even if they are from different banks. These accounts will then be closed or temporarily suspended.

Jonathan will then have to make monthly payments to the bank that provided the DCP until his debt is fully cleared.

Let’s assume that Jonathan can get a debt consolidation plan from HSBC payable over 8 years, with a flat interest rate of 3.4% p.a (EIR from 6.5% p.a). Here is how much he would be paying per month, compared to his current commitments:

 Current Payment Debt Consolidation Plan
Total outstanding balanceS$40,000S$42,000 (including fees and 5% allowance)
Interest rate26% p.a.
25% p.a.
25.95% p.a.
11.32% p.a.
3.4% p.a (EIR from 6.5% p.a)
Total monthly repaymentS$1,275 S$562
Total interest payable over 1 yearS$9,337S$1,497
Total interest payable over 8 yearsS$74,964S$11,973

These figures have been simplified for illustrative purposes. Actual figures may vary depending on your situation and the bank’s rates.

With a DCP, Jonathan’s monthly repayments become more manageable. If he can pay this monthly amount on time, he can be free from all these loans in 8 years and save over S$60,000 on interest payments alone.

SingSaver Exclusive Offer: Receive S$300 cashback when you successfully apply for an HSBC Debt Consolidation Plan. If you’re an existing debt consolidation loan holder, you’ll also be rewarded with 5% cashback upon approval of your Debt Consolidation Plan refinancing with HSBC. You’ll also get to enjoy interest rates from as low as 3.4% p.a. (EIR 6.5% p.a.).

Promotion is valid till 30 September 2021. T&Cs apply.

Can the Debt Consolidation Plan amount be deposited into your bank account?

No. The funds that you get from the Debt Consolidation Plan will be disbursed directly to the respective financial institutions with whom you have unpaid, outstanding unsecured credit facilities.

The DCP funds cannot be deposited into your designated savings or current account.

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What kinds of debt can’t be consolidated under a Debt Consolidation Plan?

DCP is only for unsecured credit facilities like credit cards, personal loans, and credit lines. 

However, certain kinds of unsecured loans are not eligible, such as education loans, renovation loans, joint accounts, medical or business loans, and credit facilities for businesses. 

Secured loans like car loans or housing loans cannot be consolidated under a DCP.

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How much can you borrow from a Debt Consolidation Plan?

Generally, banks will lend you a DCP amount equivalent to the total outstanding balance you owe, including any other fees or charges you accrued, as written in your statement of accounts.

There might be some instances where your approved DCP amount won’t be enough to repay your outstanding balances. If this is the case, you will be responsible for paying the balance directly to the financial institutions you borrowed from.

Your first DCP will also provide an additional 5% allowance above the total DCP amount. This should help you deal with incidental charges you might have incurred from the time the DCP got approved until the time the DCP funds get received.

The 5% allowance will be given directly to the financial institutions you borrowed from, and cannot be deposited into your savings or current account.

In case there is any amount left over from the 5% allowance, the excess amount will be refunded or credited back to you.

Who qualifies for a Debt Consolidation Plan in Singapore?

Debt consolidation plans are only available to Singaporeans and Permanent Residents.

To qualify, you must be a salaried employee with an annual income between S$30,000 and S$120,000. You must also have interest-bearing outstanding balances on unsecured credit facilities amounting to a minimum of 12 times your monthly income.

You can only have one DCP active at any one time. After three months, you can refinance your existing DCP with another participating bank, if you find one with lower interest rates.

There are also perks to refinancing your DCP with a different bank. For example, you can refinance your DCP with Standard Chartered and get 6% cashback. This promotion is valid till 30 September 2021.

That said, before you refinance, check with your original DCP financial institution if you would be subject to any penalty fee for terminating the DCP prematurely.

It’s important to note that once you are enrolled in an active DCP, you cannot apply for a new credit card or loan until your outstanding debt is less than 8 times your monthly salary. This allows you to stay focused on clearing out your debts.

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Where can you get a Debt Consolidation Plan in Singapore?

Debt consolidations plans are currently available at 14 participating financial institutions (FI) in Singapore:

You can apply for a DCP from any financial institution of your choice, even if you don’t bank with them yet. It is important to note that each financial institution will have their own terms, conditions, and rates for DCPs.

We suggest comparing debt consolidation plans before you push through with the institution of your choice, to make sure you’re signing up for a payment plan with interest rates that suit your financial situation.

Standard Chartered’s Debt Consolidation Plan currently offers the lowest interest rate in the market of 3.48% p.a (EIR from 6.33% p.a) with a loan tenure of up to 10 years. It allows you to consolidate all your credit cards and unsecured loan balances while enjoying attractive benefits such as receiving 6% cashback when you refinance your existing DCP from another bank with Standard Chartered. Keep in mind that the interest rate offered to you is based on your personal credit profile and may differ from the published rate. 

Documents to prepare

Before applying for any debt consolidation plan, make sure you have the following documents ready:

  • Photocopy of your NRIC (front and back)
  • Latest Credit Bureau Report
  • Latest Income Documents
  • Latest credit card and unsecured loan statements
  • A confirmation letter that shows unbilled balances for your unsecured credit card and instalment plans

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Do’s and Don’ts of a Debt Consolidation Plan

Do shop around for the lowest interest rate

There are 14 financial institutions that offer a DCP in Singapore. Before applying for one, compare interest rates and find a plan with the lowest one. 

In general, the longer the loan tenure, the more interest you will pay over the lifetime of the loan. You’ll want to make sure that you’re getting the lowest rate possible.

Some DCPs are bundled with welcome offers such as promotional interest rates, cashback, and other money-saving features. While you shouldn’t choose a financial product for the welcome gifts alone, these money-saving extras make it easier to decide between two equally promising DCPs.

Keep in mind that the interest rate offered to you is based on your personal credit profile and may differ from the published rate.

SingSaver Exclusive Offer: Receive S$300 cashback when you successfully apply for an HSBC Debt Consolidation Plan. If you’re an existing debt consolidation loan holder, you’ll also be rewarded with 5% cashback upon approval of your Debt Consolidation Plan refinancing with HSBC. You’ll also get to enjoy interest rates from as low as 3.4% p.a. (EIR 6.5% p.a.).

Promotion is valid till 30 September 2021. T&Cs apply.

Do change your spending habits

A DCP simplifies the way you pay off multiple credit card balances and takes the stress out of juggling several bills and due dates. However, this is only one part of the solution. In order to maintain your debt-free status, your spending behaviour needs to change.

Find ways to decrease your spending and consider taking up gigs on the side to supplement your income or boost your savings. Use a budgeting app to help you manage your expenses anytime, anywhere! 

A DCP will not magically solve your financial woes. Unless you learn to implement a budget and use credit responsibly, you’ll stay stuck in the same financial pit you were in before.

Don’t miss a payment

Use a DCP calculator to get an idea of how much your monthly payments will cost, then create a budget around this. Once your plan starts, your monthly payment needs to be made in full and on time – no questions asked.

If you miss a payment, you’ll get charged interest and a late fee as determined by the financial institution. This is not too different from what happens when you can’t pay your credit card bill on time. Only this time, the consequences are more dire; there are no financial products that can help you in case you default on your DCP.

Therefore, develop the discipline and habit of paying your DCP on time.

Don’t use the credit facility

As soon as your DCP gets approved, you will not be able to use your existing credit cards, personal loans, and other unsecured credit facilities.

However, DCPs come bundled with a revolving credit facility (i.e. a credit card) that has a fixed credit limit of 1x your monthly income. This is to provide you with a mode of payment in case you need help covering your daily expenses or if you run into an emergency.

As it is part of the DCP, the credit facility cannot be cancelled and you cannot lower the credit limit. Additionally, you have to bear any fees and interest rates that come with the credit facility.

Key takeaway: you are not required to use the credit facility if you don’t need to. Using the credit facility undoes all the hard work you’ve put into repaying your credit card debt and puts you in a financial hole twice as deep.

Is a Debt Consolidation Plan for you?

All in all, a debt consolidation plan is a useful tool for managing multiple high-interest debts. If you have several outstanding credit card bills and personal loans, a DCP can help you pay these off, leaving you with just one monthly payment and saving you money with lower interest rates.

Compare debt consolidation plans at SingSaver to find the one that best suits your needs and financial situation.

What if you don’t qualify for a Debt Consolidation Plan?

If you cannot qualify to get a DCP due to citizenship or outstanding unsecured debt requirements (i.e. your outstanding debt that is less than 12 times your monthly salary), you still have the option of getting a personal loan to pay off your high-interest debt.

Make sure that you use the personal loan to pay off your credit card bills and other high-interest debt the moment the funds are disbursed. Do not squander it away!

While you’re at it, make sure you make monthly repayments punctually to pay down this personal loan.

Needless to say, do your best to not overspend and avoid incurring additional debt!

Read these next:
4 Ways to Pay Off Credit Card Debt in Singapore
Best Debt Consolidation Plans in Singapore
Best Personal Loans To Ease Your Cash Flow In Singapore (2021)
What Really Happens If You Skip Credit Card Bills, Loan & BNPL Payments
Balance Transfer: How Does It Work And Should You Get One?