According to data from Credit Counselling Singapore (CCS), more than 13,000 people in Singapore are paying off their debts through a Debt Consolidation Plan with banks. The average personal debt stands at S$100,559 based on a S$3,359 monthly income. But what is a Debt Consolidation Plan? Is it right for you?
If you are here because you are interested in knowing how a Debt Consolidation Plan in Singapore work, you are most likely to be in debt, often with several creditors. You asked yourself:
"How can I clear my debt fast in Singapore?"
"What happens if I cannot pay my debts?"
"How can I pay off my debt if I'm broke?"
And then you hear schemes like "Debt Consolidation Plans (DCP)", "Debt Repayment Scheme (DRS)" or "Debt Management Programme (DMP)" being offered as a way out for you to get out of debt.
So what is it? Is a Debt Consolidation Plan a good idea?
Here's a complete guide to Debt Consolidation Plans in Singapore, brought to you by Debt Aid Singapore.
Information updated as of February 2021. Debt Aid Singapore will update this guide periodically to reflect the latest information.
What is a Debt Consolidation Plan?
A Debt Consolidation Plan in Singapore offers you the option to combine all your unsecured* outstanding balances owed across different banks into one single loan under one bank at a lower interest rate.
*Unsecured debts are those with no collateral, such as credit cards, personal loans or an overdraft (eg. DBS Cashline, OCBC EasiCredit, UOB CashPlus) and certain personal loans.
Note: There is an alternative scheme not restricted to just participating banks. You can consolidate all your unsecured borrowings such as monies owed to banks and financial institutions, licensed moneylenders, loan societies, as well as personal creditors such as relatives and friends. Read our comprehensive guide to Debt Repayment Scheme in Singapore here.
In its simplest definition, it is one single loan with a low interest rate to cover all your loans that are charging higher interests. Instead of paying several loans individually, you only pay one single loan.
You will also be given a revolving credit limit capped at a maximum of 1x your monthly income in case you need to spend for daily essentials. Think of it like an emergency fund. Resist the urge to utilise this credit to splurge as you will be adding to your outstanding balance!
If you owe different banks, many a times it will be hard to keep track of what you owe and what you have paid. It can also be frustrating to keep track of the different interest rates levied by each credit facility. Sometimes, you may even forget to pay the minimum balance on one of your loans resulting in hefty late payment interest fees.
That's where the Debt Consolidation Plan comes in. How the plan works is by focusing your payments into one single account. By doing so, you will have a better overview of where you stand in terms of what you owe.
The main benefit of a Debt Consolidation Plan, really, is the lower interest rates. How low? Think ~8.5% to 10% per annum* vs vs 24% to 27% per annum charged by most credit cards in Singapore.
*Different banks will offer different competitive rates.
Is Debt Consolidation Plan a good idea?
Yes, but it requires some painful self-discipline.
As you know, your loan's interest rate is applied on every single dollar of your outstanding balance. If you have several loan facilities, the cumulative interest rate will be levied and your outstanding balance would snowball, leaving you with a perpetual debt trap that you can possibly never get out of. A lower interest rate offered by a Debt Consolidation Plan will significantly help with alleviating your debt burden.
The Debt Consolidation Plan, however, is excluded for the following categories:
- Renovation loans
- Education loans
- Medical loans
- Joint accounts
- Credit facilities granted for businesses and business purposes
Why was the Debt Consolidation Plan created? Who is it for?
According to CCS, there are around 2 per cent of total unsecured credit users in Singapore as of March 2017, collectively owing SGD 4 billion in total. To allay this problem, the Association of Banks in Singapore (ABS) introduced the Debt Consolidation Plan to help borrowers with interest-bearing unsecured debt exceeding 12 times their monthly income.
Let's take the case of one of Debt Aid Singapore's customer Mr Danial* who owes several banks a cumulative outstanding balance of $40,000. To be specific, he has 3 credit cards and 1 personal loan.
*Name has been anonymised to protect his privacy
Mr Danial is the sole breadwinner for his family of three and has to support his parents which include footing their medical bills.
His monthly salary is S$3,000 but after deducting for CPF, his take-home pay is a total of S$2,400. He lives in a 4-room BTO flat.
Of the S$2,400 in take-home pay, Mr Danial sets aside the minimum amount of $1,275 solely for debt repayments - at times missing some months.
Going by Mr Danial's pace, it would take him approximately 8 to 10 years to clear his debts. Assuming the interest rate per annum is 25% (credit card) and 12% (personal loan), he would be paying over $9,000 in interest alone per year after taking into account the compounding effect on the outstanding balance.
Remember, interest is levied on outstanding balance. If you missed some months' payment, the interest is levied on the entire amount that is owing.
In Mr Danial's case, should he take up the Debt Consolidation Plan? If yes, what are the requirements? Let's go to the next section to find out:
Who is eligible for the Debt Consolidation Plan in Singapore?
To be eligible for the Debt Consolidation Plan in Singapore, you must:
- Be a Singapore Citizen or Permanent Resident;
- Earn between S$20,000* and below S$120,000 per annum with Net Personal Assets of less than $2 million**; and
- Have total interest-bearing unsecured debt on all credit cards and unsecured credit facilities with financial institutions in Singapore that exceeds 12 times of your monthly income.
Do not have any existing Debt Consolidation Plans in place. You can only have 1 plan active at any one time. After 3 months, however, you can refinance**** your existing plan with another if you find another bank that offers a more attractive package. That's the flexibility of the Debt Consolidation Plan.
*As the DCP is a commercial product, all offers received by applicants who meet the stated income criteria are subject to the assessments of individual financial institutions.
**The term “Net Personal Assets” refers to the total value of the individual’s assets less his liabilities. Assets should be substantiated by documents provided by the applicant.
***Some banks may charge you an early termination fee should you go with another bank after your loan has been approved.
Let's go back to Mr Danial's case.
First, let's assess his eligibility for a Debt Consolidation Plan:
Is his total owings more than 12 times his monthly salary? Yes. In fact, Mr Danial's owings are 13 times his monthly salary.
Is his annual income between S$20,000 and below S$120,000? Yes.
Is his Net Personal Assets less than S$2 million? Yes.
Does he have any other Debt Consolidation Plans with other bank(s)? No.
Next, we will see how a Debt Consolidation Plan will help with Mr Danial's case:
How does a Debt Consolidation Plan in Singapore work?
When you apply for a Debt Consolidation Plan with an authorised bank, the bank is essentially buying out your outstanding balances from the different banks and issuing you a new loan at a reduced interest rate.
How much you can borrow from a Debt Consolidation Plan differs across all banks.
For your information, if you are a first-time applicant, the bank will disburse an additional ≤5 per cent allowance above the total approved Debt Consolidation Plan loan amount to cover any incidental fees, interest and charges accrued from the time when the loan is approved until the loan amount is disbursed to the banks you currently owe money to.
The ≤5% allowance is mandatory for the first approved DCP loan.
After any new charges during that time are settled, any leftover allowance will be refunded to you by the bank that you applied your Debt Consolidation Plan with.
In Mr Danial's case, out of the S$40,000 debt owed, the bank may either approve a new loan for the entire amount or depending on their discretion, issue a partial amount, eg. S$30,000.
If the amount approved for the Debt Consolidation Plan is lower than the debt owed, Mr Danial would still have to bear the responsibility of covering the shortfall with the respective banks he owes money to.
Once approved, all credit cards and loan facilities held by Mr Danial with the other banks will be closed or suspended.
In Debt Aid Singapore's case, Mr Danial managed to secure a loan quantum matching his outstanding balance (+ ≤5 per cent allowance) for his Debt Consolidation Plan.
The loan interest rate he will pay is now 3.8% p.a (EIR from 7% p.a) compared to the average of 22.05% he was charged before the approval of his Debt Consolidation Plan.
Instead of paying S$1,275 before DCP, Mr Danial will now only pay S$571 per month over a loan tenure of 8-years.
Mr Danial's only focus now is to make the fixed monthly repayments to the bank that approved his Debt Consolidation Plan.
Will a Debt Consolidation Plan affect your credit rating with Credit Bureau Singapore?
The short answer is Yes. But, in a good way with a slight pinch.
If you owe several creditors and are usually repaying late or worse, if you default on your loan, your credit rating will be affected. This is quite common especially when you must juggle between different payment due dates.
A Debt Consolidation Plan, which is essentially another loan, could help improve your credit score by paying off all other loans. In return, you make timely repayment on your plan. Subsequently, your credit rating will improve as you reduce your debt-to-credit utilisation ratio.
Your Credit Bureau record will be updated with the “Debt Consolidation” product code as the DCP is viewed to be a unsecured credit product.
Once your Debt Consolidation Plan is complete, it will stay on your Credit Bureau report for 3 years, as is the practice for other credit products.
What about the pinch?
When you roll over existing loans into a brand new one, your credit score may be given a further lower rating because credit scores typically favour longer-standing debts that are repaid consistently.
If you make timely repayments on your Debt Consolidation loan, however, the credit score will then improve gradually.
What are the advantages and benefits of a Debt Consolidation Plan?
We have so far learnt that the Debt Consolidation Plan provides the following benefits:
- A single loan from 1 bank to cover all your outstanding loans across several different banks
- A lower interest rate compared to what the credit cards and other loan facilities are charging
- A line of revolving credit to help with your daily essentials
- Potentially improving your credit score
As we have learnt earlier on in this article, Mr Danial makes a minimum repayment amount of $1,275 monthly and pays a total interest of S$9,337 a year.
With the Debt Consolidation Plan in place, Mr Danial now only have to make a minimum repayment amount of S$571 monthly and pay a total of S$1,602 in interest per year.
For the 8-year period, the total interest that Mr Danial would have to pay if he did not have a Debt Consolidation Plan in place is S$74,964. However, with the plan in place, he only pays S$12,816, a savings of S$62,148!
In addition, instead of forking out S$1,275 monthly for repayments, he saves S$704 a month with the Debt Consolidation Plan. This leaves him with more breathing room to use the savings for his daily essentials and rainy-day fund.
These figures have been simplified for illustrative purposes. Actual figures may vary depending on your personal credit profile and the respective bank’s rates.
How much does a Debt Consolidation Plan in Singapore cost?
Each Debt Consolidation Plan offered in Singapore by participating banks comes with its own set of fees. Here are the fees to look out for:
1. Processing fees
Some banks offer zero processing fees such as OCBC, UOB, Citibank, and HSBC. Both DBS and POSB charges a processing fee of S$99 while the highest fees charged are S$199 and S$600 by Standard Charted and Bank of China respectively.
2. Annual Interest Rate (AIR) and Effective Interest Rate (EIR)
Just because a bank charges zero processing fees, it does not mean it is the cheapest.
For example, OCBC has S$0 processing fees but charges an AIR of 6% (EIR 11.08%) per annum vs Standard Chartered's S$199 processing fees and AIR of 3.48% (EIR 6.7%) per annum.
Banks may revise their rates periodically so please check directly on their website.
Aside from the AIR, you will also have to take into account the EIR. So what exactly is the EIR (Effective Interest Rate) and why is it higher than the AIR (Annual Interest Rate)? Which one will I be charged?
Think of the Effective Interest Rate as the fine print.
The Annual Interest Rate is the rate advertised by banks to let you know how much interest they will charge based on how much you borrow. The Effective Interest Rate is the true cost of such borrowings.
The Effective Interest Rate is generally higher than the advertised Annual Interest Rate because it includes other costs such as service fees or admin charges associated with issuing you a loan.
Effective Interest Rate also consider the number of instalments, frequency of instalments and whether the instalment amounts are equal or not.
When choosing which Debt Consolidation Plan in Singapore to apply for, pay close attention to the Effective Interest Rate as it gives you a more accurate indication of the true cost of your loan. However, don't just base your decision on EIR alone. Always check prevailing fees and rates with the bank's representative.
How to apply for a Debt Consolidation Plan in Singapore?
To apply, the following documents need to be submitted at the point of application with the participating banks:
- Copy of NRIC (front and back); and
- Latest Credit Bureau Report; and
- Latest Income Documents (refer to the application form for acceptable income docs); and
- Latest credit card and unsecured credit loan statements (physical or online); and
- Confirmation letter evidencing unbilled principal balances for unsecured credit instalment plans (If any)
- Settlement notice from the original DC bank (only applicable to DCP refinancing applications)
You can apply for a Debt Consolidation Plan with any participating banks in Singapore.
Do you need to continue repaying the outstanding balances on your existing unsecured credit facilities while your Debt Consolidation Plan application is pending approval?
Yes, you shall continue to be liable for your existing unsecured credit facilities and will be bound by the terms and conditions governing such facilities, before your Debt Consolidation Plan application is approved.
Upon the approval of your Debt Consolidation Plan loan, you need only repay your monthly repayment amount to the approving financial institution. If the ≤5% Debt Consolidation allowance is insufficient to cover any incidental charges incurred from the time that your loan is approved to when the loan amount is disbursed to your financial institutions, you will also be responsible for settling the shortfall directly with your financial institutions.
We have listed the participating banks and financial institutions offering Debt Consolidation Plans in Singapore at the end of this article.
What happens when your Debt Consolidation Plan application gets approved?
1. Granting of the Debt Consolidation Plan loan amount and tenure
When your Debt Consolidation Plan application gets approved, the bank or financial institution will disburse the approved loan amount to you.
If you are a first-time applicant, the amount disbursed will typically be equivalent to the total outstanding balance (including any interest and fees on your account statement with the other creditors) plus an additional 5% allowance.
Some banks may have the discretion to grant you an approved loan amount not equivalent to your total outstanding balance. In this case, you will have to pay the balance shortfall directly with your other creditors.
2. Closure of your existing unsecured loan and credit card facilities
If your Debt Consolidation Plan is approved, all your existing unsecured personal loans and credit cards will be closed. This is done by the approving bank who will proceed to pay down your outstanding amounts with existing financial institutions and will also notify your existing financial institutions of account suspension. You do not have to let your other banks know.
On your end, you should terminate any existing recurring/GIRO arrangements you may have on your existing unsecured credit facilities.
When your Debt Consolidation Plan is approved, you will not be able to apply for any new unsecured credit facilities unless your balance- to-income ratio (BTI ratio) falls below:
8 times if you are applying for a new unsecured credit facility with a financial institution that is not administering your Debt Consolidation Plan; or
4 times if you are applying for a new unsecured credit facility with a financial institution that is administering your Debt Consolidation Plan.
Your BTI ratio is calculated by taking your total unsecured loans (including interest) across all banks divided by your monthly income.
3. Issuance of one revolving credit facility
You will be granted a revolving line of credit valued at a strict maximum of 1x your monthly income for your daily essentials and rainy-day fund. You are not required to use it if you do not feel it is necessary to do so.
Do note that you will not be able to request a temporary credit limit increase for the credit facility.
4. Making repayments to your Debt Consolidation Plan including early settlement
You will be required to make monthly fixed payments to the approving bank.
The loan tenure of your Debt Consolidation Plan will determine the length of time that you will have to make the monthly repayment for. A loan tenure is typically offered between 1 to 10 years depending on individual banks.
Can I settle the DCP balance anytime when I have available funds?
Yes. However please note that you may need to pay a prepayment fee or "Early Termination fee" at such rate as financial institutions may from time to time prescribe. Please check with your DCP financial institution on the specific repayment fee amount, if any.
What are the disadvantages of a Debt Consolidation Plan?
Here are the disadvantages of applying for a Debt Consolidation Plan in Singapore:
1. Higher monthly payments
If you have a credit card, you will notice that they do not have a fixed payment amount each month. You are only - at best - required to pay the minimum amount indicated on your bill (eg. 3% of the outstanding balance)
A Debt Consolidation Plan requires you to make a monthly fixed payment which is of a higher amount. If you are already struggling with making the minimum monthly repayments required by your credit card providers, a Debt Consolidation Plan may not be suitable for you.
2. Lack of financial discipline resulting in the snowballing of your debt
A Debt Consolidation Plan is essentially a new loan.
To make the higher monthly repayments, you will have to significantly reduce your spending habits.
There were instances where borrowers utilise the available revolving credit offered by the Debt Consolidation Plan without any effort to repay them. In turn, they started to owe more due to hefty late payment penalties levied by the Debt Consolidation Plan.
A Debt Consolidation Plan will not automagically solve your debt problems. Unless you learn to implement a budget and use credit responsibly, you will stay stuck in the same debt trap you were in before.
What happens if you fail to pay off the Debt Consolidation Plan loan amount?
Every Debt Consolidation Plan will come with its set of terms which will cover instances where you are unable to make a repayment.
These terms will include a charge of a late payment fee and additional interest should you miss your monthly repayment.
If you default on your Debt Consolidation Plan, you will also be unable to apply for new credit cards, unsecured loans or increase your credit limit with any other banks or financial institutions.
Additionally, the bank may have the discretion to terminate the Debt Consolidation Plan if they feel that you are no longer capable of sustaining your monthly payment obligations.
When the termination happens, all outstanding amount from the Debt Consolidation Plan may become due and payable immediately. Legal proceedings may also commence to enforce the payment of the debt.
What are the banks in Singapore offering Debt Consolidation Plans?
Debt consolidations plans are currently available at 14 financial institutions (FI) or banks 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
- Standard Chartered Bank (Singapore) Limited
- Maybank Singapore Limited
- Oversea-Chinese Banking Corporation Limited
- RHB Bank Berhad
- United Overseas Bank Limited
- Industrial and Commercial Bank of China
You can apply for A Debt Consolidation Plan from any of the banks and or financial institution listed above, even if you are not their customer. Each bank will have different interest rates and terms so make sure you do your own research. You can start here.
Closing thoughts on Debt Consolidation Plans in Singapore
Over at Debt Aid Singapore, we understand that in times of desperation, you will want to find a solution to your debt problems as quickly as possible so that you can lift the heavy burden. That is understandable.
However, do not sign off on a Debt Consolidation Plan without first doing your research on the available plans out there. Most importantly, manage your expectations and be absolutely meticulous with your budgeting - find out how much you owe, and how much it's costing you evey month.
We cannot stress this enough, but a Debt Consolidation Plan is futile without self-discipline. You will need to change your spending habits, shed off unnecessary expenditure and be committed. It will be painful there is no doubt about it, but it is worth the sacrifice if you want a better future.
If you are unsure of which Debt Consolidation Plan to take or whether you are qualified for it, get in touch with Debt Aid Singapore and our consultants can advise you accordingly.
Alternatively, you may also be interested in Debt Repayment Scheme (DRS) if you would like to consolidate all unsecured borrowings such as monies owed to banks and financial institutions, licensed moneylenders, loan societies, as well as personal creditors such as relatives and friends. Read our comprehensive guide to Debt Repayment Scheme in Singapore here.