What is a debt consolidation plan and how does it work in Singapore?
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PUBLISHED ONMay 14, 2020 2:24 AMByLauren Dado
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.
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, and credit facilities for businesses.
A DCP is usually recommended only if you have 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 $3,000 and a current outstanding balance of $40,000 between 1 personal loan and 3 credit cards from different banks.
| Outstanding Balance | Interest Rate | Minimum Payment | |
| Credit Card 1 | $15,000 | 26per cent p.a. | $450 |
| Credit Card 2 | $10,500 | 25per cent p.a. | $315 |
| Credit Card 3 | $8,000 | 25.95per cent p.a. | $240 |
| Personal Instalment Loan (24 months) | $6,500 | 11.32per cent p.a. | $270 |
Jonathan is barely keeping up with the minimum payment of $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 $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 3.8per cent p.a (EIR from 7per cent p.a). Here is how much he would be paying per month, compared to his current commitments:
| Current Payment | Debt Consolidation Plan | |
| Total outstanding balance | $40,000 | $42,000 (including fees and 5per cent allowance) |
| Interest rate | 26per cent p.a. 25per cent p.a. 25.95per cent p.a. 11.32per cent p.a. |
3.8per cent p.a (EIR from 7per cent p.a) |
| Total monthly repayment | $1,275 | $571 |
| Total interest payable over 1 year | $9,337 | $1,602 |
| Total interest payable over 8 years | $74,964 | $12,816 |
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 .
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.
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Your first DCP will also provide an additional 5per cent 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 5per cent 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 5per cent allowance, the excess amount will be refunded or credited back to you.
Some financial institutions provide complimentary services that will help you make your payments despite unforeseen events.
For instance, Citibank’s Debt Consolidation plan offers free insurance that will guarantee the payment of your outstanding debt up to $160,000 in case of accidental death or total permanent disablement.
In case you get retrenched or lose your job involuntarily, the insurance plan will also cover the minimum payment due each month up to 6 months.
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 $30,000 and $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 1 DCP active at any one time. After 3 months, you can refinance your existing DCP with another participating bank, if you find one with lower interest rates.
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.
Where Can I Get a Debt Consolidation Plan in Singapore?
Debt consolidations plans are currently available at 14 participating financial institutions (FI) in Singapore:
- American Express International, Inc.
- Bank of China Limited Singapore
- CIMB Bank Berhad
- Citibank Singapore Limited
- DBS/POSB Bank Ltd
- Diners Club Singapore Pte Ltd
- HL Bank
- HSBC Bank (Singapore) Limited
- Industrial and Commercial Bank of China Limited
- Standard Chartered Bank (Singapore) Limited
- Maybank Singapore Limited
- Oversea-Chinese Banking Corporation Limited
- RHB Bank Berhad
- United Overseas Bank Limited
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.
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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.
DBS/POSB’s Debt Consolidation Plan currently offers the lowest interest rate in the market of 3.58per cent p.a (EIR from 6.56per cent p.a) with a loan tenure of up to 8 years.
It allows you to consolidate all your credit cards and unsecured loan balances while enjoying attractive benefits such as receiving 3per cent cashback when you refinance your loan with DBS/POSB.
Keep in mind that the interest rate offered to you is based on your personal credit profile and may differ from the published rate.
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
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.
This article was first published in SingSaver.com.sg.