Personal Finance

How Does A Debt Consolidation Loan Work?

January 12, 2023

Unexpected expenses can quickly plunge you into a financial debt trap. Such traps, unless resolved early, can lead to a lot of stress and unwanted problems.

In some cases, debt can be accumulated due to poor habits, such as taking loans to buy luxury goods. Nevertheless, it is vital to break the debt cycle early by paying off all your loans.

However, this isn’t always as easy, especially when you have other financial obligations. So what do you do? One way is to get a debt consolidation loan.

Such a loan allows you to settle all your pending loans conveniently. In this post, we’ll explore more on how does debt consolidation loan work, starting with:

What Is A Debt Consolidation Loan?

Debt consolidation involves combining all your loans or liabilities into one loan using this single loan to pay all your debts. You can choose debt consolidation loans from licensed money lenders, or debt consolidation plans (DCPs).

A DCP is a debt refinancing programme that helps you to manage all your debts, including personal loans and credit card debts. It is offered by various financial institutions.

A DCP reduces your debt burden by allowing you to pay automatic monthly installments for 10 years. By extending your current loan tenure to 10 years with a DCP, the amount you are required to pay monthly is significantly reduced, along with a lower interest rate.

However, a DCP can only be used when your current debt is more than 12 times your monthly salary.

How Does A Debt Consolidation Plan Work?

A debt consolidation plan in Singapore involves taking a consolidation loan from a bank or financial institution. The said bank or financial institutions will then buy off all your loans and become the single lender you owe.

Let’s say you owe lenders A, B, and C. All these loans amount to more than 12 times your monthly salary. You can approach one of the lenders that offers debt consolidation, such as lender B.

Lender B will then approach lenders A and C and buy off or acquire your loans (often at a discount). Once done, all your loans and debt obligations will be transferred to lender B as a single loan.

As with any loan, you must make monthly payments towards this single loan until it is fully paid off.

With a DCP, your monthly loan obligations become more manageable, and you can easily make payments on time and clear it in 10 years.

Since the interest rate will be reduced upon consolidation, the amount you pay in total will be lower, saving you more money in the end.

So how does debt consolidation loan work with a secured loan? It doesn’t.

This is because debt consolidation only applies to unsecured loans. Secured loans, including housing, business, and renovation loans, are not covered.

You will have to seek other alternatives to consolidate such loans. Some of these alternatives will be discussed later.

How To Use A Debt Consolidation Calculator

A debt consolidation calculator allows you to compare different consolidation plans from various lenders or banks.

Doing a comparison is essential because the interest rates and packages differ across different lenders depending on your:

  • Loan amount
  • Loan tenure
  • Monthly income
  • Citizenship status

As such, by using a calculator, you can compare different plans and find one that fits your situation.

To use the calculator, you will need to accurately enter the variables listed above. The calculator will then generate interest rates and repayment plans based on the information provided.

You can also play around with the loan amount and tenure until you find a monthly repayment plan that’s good for you.

Do note that the figures provided by the online calculator are only estimates. As such, the final figures will vary depending on the lender you choose for your debt management plan in Singapore.

Where To Apply For A Debt Consolidation Plan

In Singapore, you can apply for a debt consolidation plan in one of the following participating financial institutions:

  • American Express International, Inc.
  • Bank of China Limited Singapore
  • CIMB Bank Berhad
  • Citibank Singapore Limited
  • DBS 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

As we’ve mentioned, your final debt consolidation loan in Singapore, as well as the interest rate and repayment plan, will depend on your chosen financial institution. This is because each institution has its terms and conditions for debt consolidation.

Luckily, you can shop for the best terms since you are not required to be an account holder with the financial institution to qualify for DCP.

When submitting your application, you will need the following documents:

  • Latest income documents
  • Latest Credit Bureau Report
  • Latest credit card and unsecured loan statements
  • Photocopy of your NRIC (front and back)
  • Confirmation letter stating unbilled balances for your unsecured credit installment plans

Have these documents ready before you apply, as they will influence the timeline of the approval for your application for debt consolidation in Singapore.

How Much Can You Borrow?

The financial institution will provide you with a DCP in an amount equal to your overall outstanding debt, which includes all additional fees.

However, if your debt is too high, the amount offered may not be enough to cover your outstanding debt. You will be required to settle the balance directly with the financial institution or lender you borrowed from – if not, the debt will not be cleared.

In addition, your first DCP will give you a 5% allowance over and above the overall DCP sum. This should make it easier for you to pay any incidental expenses you may have had between the time the DCP was approved and when the DCP monies were received.

Qualifying Criteria

Now that how does debt consolidation work in Singapore is clearer to you, it is worth noting that DCP is only viable for Singapore citizens and permanent residents (PRs).

You must also be employed and earn an annual income of $20,000 to $120,000. In addition, the value of your assets minus your liabilities should not exceed $2 million.

Moreover, your outstanding debt balances should be at least 12 times your monthly income.

While you can only have one active DCP at a time, you can refinance it after three months. This is advantageous if you find another DCP with favourable terms and lower interest rates.

However, there may be penalties for terminating your DCP prematurely, so be sure to check with the financial institution before refinancing.

Lastly, to allow you to focus on paying off your debts, you cannot apply for a new loan or credit card until your current debt is less than eight times your monthly salary.

Alternatives

Since loans for consolidating debt are only viable for unsecured loans, you have to find other ways to consolidate secured loans.

You can apply for a personal loan from any money lender, such as GS Credit. This kind of debt consolidation plan from a money lender offers competitive rates, flexible repayment terms, and the application is often approved within an hour.

With a personal loan, you can consolidate your:

  • Credit card debts
  • Renovation loans
  • Joint account loans
  • Multiple personal loans
  • Student loans

This is a good option when your total debt for unsecured loans is less than 12 times your monthly income.

Use A Debt Consolidation Loan To Pay Off Your Debt

So how does debt consolidation loan work? A debt consolidation loan is a type of loan that allows you to combine all your current loans and then pay them off.

Since settling multiple loans can be draining, consolidating them makes it easier for you to manage your debt and obligations.

However, since consolidation loans are only viable for unsecured loans, you have to seek other alternatives for secured loans.

For this, we recommend you apply for a loan with GS Credit, a reputable licensed money lender in Singapore. You can then use this loan to clear your pending secured loans. Contact us now to find out more.

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