Everything you need to know about debt consolidation loans in Singapore

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How many active loans do you have? If you have multiple loans, debt consolidation might be right for you. Wasting no time, let’s dive right into what debt consolidation is all about.

As the name implies, debt consolidation is the consolidation of multiple loans into one place. If you owe money to different creditors, you might want to combine the various debts into a single debt.

For example, if you have outstanding credit card debts, car loans or student loans to pay off, you can combine these three loans into a single new debt. By organising your accounts in one place, you only need to pay one monthly payment instead of making separate repayments for each loan.

What are some benefits of debt consolidation?

1. Save money on interest

One of the most common motivations for debt consolidation is to save money on interest. If you have credit card debt, debt consolidation might be especially beneficial. In Singapore, the average interest rate for credit cards is around 25 per cent. Meanwhile, the effective interest rate for personal loans ranges from 11 per cent to 14 per cent.

Therefore, if you use a debt consolidation plan, you are likely to get a significantly lower interest rate than what you are paying on your credit card. With a lower interest rate through debt consolidation, you could save hundreds of dollars on interest spent. So, if you are burdened with a substantial amount of high-interest debt, you might want to try a debt consolidation plan with competitive interest rates.

2. Streamline your finances

Keeping track of your monthly repayments can be tedious. Another common reason to consolidate debt is to streamline monthly repayments. With debt consolidation, you no longer have to worry about multiple due dates every month as you only have to make one repayment.

Moreover, each payment is a predetermined fixed amount, so you know exactly how much to set aside each month. It will help you work towards a debt-free lifestyle as you will have a better idea of when your debts will be paid off entirely. Essentially, debt consolidation helps manage finances efficiently and reduces the chances of missed or late payments.

3. Repay debt quicker

A debt consolidation plan can help you pay off your debts sooner. The faster you repay your debts, the lower the interest paid. It is especially effective for credit card debt. Credit cards do not have a fixed timeline for paying off debt, while a debt consolidation plan does.

Hence, with fixed payments every month, a debt consolidation plan may help you settle your credit card loans within a stipulated time and prevent you from dragging out your repayments. It will help to put you out of debt sooner. With that, you can channel your money towards other financial goals you might want to achieve -- such as buying your first house or preparing for retirement.

4. Ability to select your own loan tenure

In Singapore, there is a minimum monthly payment for most credit cards. If you do not pay the required amount, you will incur late payment fees. Conversely, if you use a debt consolidation plan, you can choose your loan tenure to make monthly payments a bit more feasible. With a debt consolidation plan, you can opt for loans tenures up to 10 years.

The longer your loan tenure, the lower your repayment amount every month. A lower monthly repayment amount might be more manageable for you. However, it is imperative to note that a longer loan tenure means that you will be paying more interest over time. Hence, if possible, try to make more monthly repayments to prevent higher interest charges.

ALSO READ: Do's and don'ts of a Debt Consolidation Plan

Downsides of debt consolidation

1. Will not solve all your financial problems

Before taking out a debt consolidation plan, there are some drawbacks that you should consider. For one, it will not solve all your financial problems. Though a debt consolidation plan is an effective way for you to pay off your outstanding debts, it will not stop the financial habits that led you to be in debt in the first place.

If you are prone to falling into a debt trap, you need to fix these financial habits. You can start by keeping to a monthly budget, so you do not spend beyond your means. You might also want to improve your saving habits by setting aside a fixed amount every month for your nest egg.

2. Missing payments can be detrimental

If you miss your monthly loan repayments, you will likely incur a late payment fee. Late payment fees can substantially increase your borrowing costs. One way to prevent forgetting your monthly loan repayments is to enrol in your lender's automated payment program if they have one.

Moreover, you should also ensure that you can afford the monthly repayments so that you can comfortably cover the payments every month. Stay on top of your payments so that you do not end up with more debt than you started with.

3. Potential added costs

Most debt consolidation plans come with additional costs. Typical costs include annual fees, and processing fees, among other things.

Hence, before taking out a debt consolidation plan, do your due diligence by reading the fine print of the plans offered by lenders. By doing so, you will have a better understanding of the true costs that come with debt consolidation plans.

Is a personal loan the same as a debt consolidation loan?

More often than not, people tend to mix up personal loans and debt consolidation loans. Essentially, there is not much difference between a personal loan and a debt consolidation loan. A debt consolidation loan is a type of personal loan.

What is a personal loan? When you take out a personal loan, you will receive a sum of money that you will need to repay over a fixed period. Most personal loans come with set interest rates and repayment periods. Why do people take out personal loans? It is because you can use it for anything. Here are some examples of situations that may require you to get a personal loan:

  • Family Emergency
  • Medical Emergency
  • Wedding
  • Vacation or Honeymoon
  • Pay Off Credit Cards
  • Education Expenses

In Singapore, there are three main types of personal loans available to consumers via bank lenders in Singapore. They are personal instalment loans, credit lines and balance transfers.

ALSO READ: OCBC personal loan review: Interest rates, approval times and loan amounts

Best debt consolidation loans to consider in Singapore

HSBC debt consolidation plan

PROMO: Get 5 per cent Cashback on refinancing

Apply Now Apply Now Consider this if you prefer a long-term plan with the competitive interest rates and no processing fees

  • Balance to income ratio
    • More than 12x monthly income
  • Early repayment fee
    • 5 per cent of redemption amount
  • Late Payment Fee
    • $75
  • Processing Fee
    • $88 or 1 per cent, waived for online applications
Promotion:
  • 5per cent cashback (refinancing only) OR $300 cashback (new/first DCP)
  • Free Credit Bureau Report

HSBC's debt consolidation loan is the best offering in the market for borrowers seeking large or long-term debt consolidation plans. This is because HSBC charges a low interest rate (from 3.4 per cent p.a.), while also waiving its processing fee. For instance, for loan tenures of one-10 years, it only charges a flat rate of 3.4 per cent, which is cheaper than the average rate.

PROMO: Get 5 per cent Cashback on refinancing

Apply Now Apply Now Consider this if you prefer a long-term plan with the competitive interest rates and no processing fees 

  • Balance to Income Ratio
    • More than 12x monthly income
  • Early Repayment Fee
    • 5 per cent of redemption amount
  • Late Payment Fee
    • $75
  • Processing Fee
    • $88 or 1per cent, waived for online applications
Promotion:
  • 5per cent cashback (refinancing only) OR S$300 cashback (new/first DCP)
  • Free Credit Bureau Report

HSBC's debt consolidation loan is the best offering in the market for borrowers seeking large or long-term debt consolidation plans. This is because HSBC charges a low interest rate (from 3.4 per cent p.a.), while also waiving its processing fee. For instance, for loan tenures of one-10 years, it only charges a flat rate of 3.4 per cent, which is cheaper than the average rate.

Maybank debt consolidation plan

PROMO: Rates as low as 3.88 per cent p.a.

Apply Now Apply Now Consider this if you are offered one of their lowest rates and are unable to secure financing elsewhere 

  • Balance to income ratio
    • More than 12x monthly income
  • Early repayment fee
    • 5 per cent of outstanding balance or $800, whichever is greater
  • Late payment fee
    • 5 per cent of the minimum monthly repayment or $80, whichever is higher
  • Processing fee
    • N/A
Promotion:
  • Promotional interest rates as low as 3.88 per cent p.a. (6.92 per cent EIR)
  • 5per cent cash rebate upon loan approval

Maybank's debt consolidation loan is worth considering due to its promotional interest rate and cashback promotion.

The bank is currently offering promotional interest rates as low as 3.88 per cent p.a., Maybank is also offering a 5 per cent cashback promotion for new DCP customers. Therefore, if you prefer a cashback promotion, Maybank is a good choice.

PROMO: Rates as low as 3.88 per cent p.a.

Apply Now Apply Now Consider this if you are offered one of their lowest rates and are unable to secure financing elsewhere 

  • Balance to income ratio
    • More than 12x monthly income
  • Early repayment fee
    • 5 per cent of outstanding balance or $800, whichever is greater
  • Late payment fee
    • 5 per cent of the minimum monthly repayment or $80, whichever is higher
  • Processing fee
    • N/A
Promotion:
  • Promotional interest rates as low as 3.88 per cent p.a. (6.92 per cent EIR)
  • 5 per cent cash rebate upon loan approval

Maybank's debt consolidation loan is worth considering due to its promotional interest rate and cashback promotion.

The bank is currently offering promotional interest rates as low as 3.88 per cent p.a., Maybank is also offering a 5per cent cashback promotion for new DCP customers. Therefore, if you prefer a cashback promotion, Maybank is a good choice.

CIMB Bank debt consolidation plan

Apply Now Apply Now Consider this if you are unable to obtain another debt consolidation loan

  • Balance to income ratio
    • More than 12x monthly income
  • Early repayment fee
    • 3 per cent of outstanding principal amount or $250, whichever is greater
  • Late payment fee
    • $100
  • Processing fee
    • 1 per cent

CIMB's debt consolidation plan comes with the lowest advertised flat interest rate, of 2.77per cent. However, it charges a one time processing fee of 1per cent, which makes it slightly less competitive than other debt consolidation plans.

Not only that, you should note that CIMB's rate is not guaranteed for all borrowers. CIMB's exact language is "interest rates are as low as 2.77 per cent," and your approved interest rate can be materially higher than the published rate depending on your credit score.

Apply Now Apply Now Consider this if you are unable to obtain another debt consolidation loan 

  • Balance to income ratio
    • More than 12x monthly income
  • Early repayment fee
    • 3 per cent of outstanding principal amount or $250, whichever is greater
  • Late payment fee
    • $100
  • Processing fee
    • 1 per cent

CIMB's debt consolidation plan comes with the lowest advertised flat interest rate, of 2.77per cent. However, it charges a one time processing fee of 1per cent, which makes it slightly less competitive than other debt consolidation plans.

Not only that, you should note that CIMB's rate is not guaranteed for all borrowers. CIMB's exact language is "interest rates are as low as 2.77per cent," and your approved interest rate can be materially higher than the published rate depending on your credit score.

Who can take out a debt consolidation loan in Singapore?

There are a few requirements necessary for one to take out a debt consolidation loan in Singapore. In order to be eligible for a debt consolidation plan, the borrower must be a Singapore Citizen or Permanent Resident.

Their annual income must be between $20,000 and $120,000. Additionally, eligible borrowers must not have net assets exceeding $2 million. Applicants must also have interest-bearing non-secured debt on credit cards and unsecured credit facilities exceeding 12 times their monthly income.

Examples of debt that cannot be consolidated with a debt consolidation plan include joint accounts and renovation, medical, business and education loans. Finally, those with existing debt consolidation plans may refinance three months after the approval of their existing DCP.

Summary of DCP Eligibility Requirements:

  • Singapore Citizen or Permanent Resident
  • Annual Income between $20,000 and S$120,000
  • Net Personal Assets less than $2 million
  • Total interest-bearing debt of more than 12 times monthly income

How to choose a debt consolidation plan?

  • Begin by making a list of all your current outstanding loans. The list should include the loan amount, interest rate, monthly repayments and remaining balance left for payment.
  • Subsequently, start looking around for debt consolidation plans available in the market.
  • When comparing quotes from various lenders, there are two factors to consider. Firstly, decide on the duration of your loan repayment. Debt consolidation loans typically range from one to 10 years. Secondly, you need to consider the total cost of your debt consolidation plan. Take note of the interest rates, processing fees and other promotions. Do carefully review the fine print of each loan.

The bottom line

Ultimately, a debt consolidation plan is one way for you to repay your debts. For a debt consolidation plan to be beneficial, you need to create and stick to a plan that best suits your lifestyle and needs.

If a debt consolidation plan is not for you, you can also opt to borrow money from a licensed moneylender in Singapore to pay down your debts.

This article was first published in ValueChampion.