Keeping track of all your unsecured debts can be challenging, especially when you have different creditors and different repayment dates.
This can worsen the situation as you may end up skipping payments, after which you will incur late payment fees that plunge you into more debt.
What do you do at this point where you’re overwhelmed with debt? Well, a debt consolidation loan can help you combine all your debts into one, and make it easier for you to keep track.
How does debt consolidation loan work, and are you eligible for debt consolidation? Read on to find out.
What Is A Debt Consolidation Loan?
A debt consolidation loan helps you manage your unsecured debts by combining them into one single loan. This single loan is now paid in monthly installments for up to 10 years and at a lower interest rate.
With a debt consolidation loan in Singapore, you’re less likely to skip payments and due dates, as you don’t have many loans lying around.
However, not all loans can be consolidated. Only unsecured loans can be consolidated, and there are some exceptions of unsecured loans that cannot be consolidated.
They include:
- Medical loans
- Renovation loans
- Education loans
- Business-related credit facilities
- Loans granted under joint accounts
Licensed money lenders offer debt consolidation loans. Banks and financial institutions offer debt consolidation plans, which are slightly different.
Be aware also that debt consolidation plans will only be granted if your outstanding debt balance is at least 12 times your monthly salary.
How Does A Debt Consolidation Plan Work?
A debt consolidation plan works by combining all your unsecured debts into a single loan at a more favourable interest rate.
Take for instance Mr Ang, who has a monthly salary of $4,000. Monthly payments for all his unsecured debts, including credit cards, personal loans and interest amount to $2,250. Assume also that altogether Mr Ang has an outstanding debt balance of over $60,000.
What Mr Ang can do is apply for a debt consolidation plan or loan from a bank or a licensed money lender in Singapore respectively. The loan provider granting him the loan will give him a single loan, and settle all of his other creditors.
This single loan will be definitely cheaper in interest rate compared to having different loans in different places.
Also, Mr Ang can now manage his debt better, and pay the loan provider in monthly installments throughout the repayment period, and hence save on interest fees.
Keep in mind that the debt consolidation loan isn’t paid into your account for you to settle your creditors.
The debt consolidation plan provider disburses the funds directly to the institutions or creditors you owe.
How Much Can You Borrow?
Now we have answered your question on how does debt consolidation loan work, the next thing is to know how much debt you can consolidate.
The debt consolidation loan amount you can get will be dependent on how much you owe, including principal loan amount, interest rates, and other fees that might have accrued on your existing unsecured loans.
In addition to the amount of your debt, your first DCP will be charged at an extra 5%. This 5% is to settle any incidental charges that you might have incurred from when the debt consolidation plan got approved to when the funds were disbursed.
If the 5% is more than sufficient to cover any incidental charges, any balance left will be refunded to you.
However, understand that in some circumstances, the debt consolidation loan or plan may not be sufficient to repay all your creditors. At this point, you’ll be required to pay the outstanding balance directly.
Qualifying Criteria
Not everyone is eligible for a debt consolidation plan in Singapore. To qualify for debt consolidation, you must meet the following qualifying criteria.
- Be a citizen of Singapore or a permanent resident
- Earn annual income between $30,000 to $120,000 with net personal assets of less than $2 million
- Have an outstanding unsecured loan balance that is at least 12 times your monthly income
If you do not meet the above criteria, you won’t qualify for debt consolidation. However, there are other ways to manage your debt we’ll talk about in the last section of this article.
Keep in mind that you can only have one debt consolidation plan at a time. You can apply at another bank or licensed money lender to refinance your debt consolidation loan if you see one with a low interest rate or better promotion such as cashbacks. However, there might be fees incurred if you terminate the debt consolidation plan prematurely.
So check with your existing debt consolidation loan provider before you refinance with another institution.
Once you have taken out a debt consolidation loan, you cannot apply for a new loan until your debt is at most eight times more than your monthly income. This is to keep you focused on repaying your debt.
How To Use A Debt Consolidation Calculator
It can be difficult to determine how much you can pay monthly with debt consolidation; and this is where a debt consolidation calculator comes in.
The debt consolidation calculator gives you an idea of how much your monthly repayment will be, and how much your total savings will be once you consolidate your debt.
Some debt consolidation calculators will also show you different promotions from banks or other institutions to help you shop around for the best interest rate.
Note that what the calculator shows you may be different from what you’ll actually pay. Those figures are to give you an idea of what to expect once you consolidate.
Where To Apply For Debt Consolidation
About 14 financial institutions offer debt consolidation plans in Singapore, which are as follows:
- 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 also get a debt consolidation loan from licensed money lenders. We advise individuals looking to consolidate their debts to shop around for banks or money lenders with the best interest rate.
Alternatives To Debt Consolidation
If you’re choked with debt, but not eligible for a debt management plan in Singapore, there are a couple of alternatives to debt consolidation to help you manage your debt.
Personal Loans
You can take out a personal loan to pay off your high interest unsecured debts. Do not be tempted to take out a personal loan and squander it away.
Life Insurance Policy
If you have a life insurance policy, you can borrow against it to help you repay your debt. However, you must have enough cash value in your policy for you to be eligible.
Credit Counselling
You can choose to get help on how to manage your finances and your debt better. Credit Counselling Singapore can help you negotiate with your lender for a favourable debt repayment arrangement.
Although this service isn’t free, and there is no guarantee that you’ll get a better deal, it’s a good start in getting your debt situation in order.
Consider A Debt Consolidation Loan Today
Now that you know how does debt consolidation loan work, you no longer have to get overwhelmed with keeping track of all your debts.
Lending Bee allows you to consolidate all your unsecured debts into a single loan at a lower interest rate.
This means you only make a single monthly payment to us and you can now keep track of your debt, avoid missing due dates, and save on interest fees.
To get started, you can apply for a debt consolidation loan online or call us to speak to one of our loan experts.
About Ashley Sim
Calling herself a “professional multi-tasker”, Ashley worked as a relationship manager in a bank for five years. She left her job just before the pandemic happened and became a freelance writer for about a year. Now, she’s making the most of her love for writing and knowledge of the banking and financial industry in her role as a content marketing lead. She hopes to help people make better financial decisions through her content and campaigns.
