Is A Debt Consolidation Plan Right For You?

Debt consolidation makes repayment a lot easier, but it is not the best solution for everyone. Since the interests grow faster than you are able to repay the outstanding balance, it is hard repaying overdue credit card debts, not to mention several. When your debts get over 12 times what you earn each month, having to deal with it may seem impossible without getting professional help.

In early 2017, Debt consolidation plans (DCP) was announced to help give relief to many Singaporeans who are struggling with several unsecured debts. The advantage of taking a DCP is the easy management of debt. You repay your credit cards debts and personal loans all at once, in exchange for a single monthly payment at a lower rate. You have the choice to make a much smaller payment each month by pushing the loan period to about 7 to 10 years.

However, make sure you do your homework to ensure that debt management is the right tool for you before applying for one.

Consolidating Debt Doesn’t Mean The Debt Is Forgiven

One thing to remember about DCP’s is that it’s not similar to getting your debt reduced or forgiven. It only makes the debts more manageable. Although your repayments for each month may be lower, your loan amount is still the same. Ensure that you have a working budget for your repayments for each month and do all that you can to pay promptly. Otherwise, you might end up paying late fees and even stiff penalties.

Though you may be on DCP, take time to rethink your spending habits and find ways to reduce your spending. Debt consolidation isn’t a fix-all for your financial issue. Unless you get to execute a budget as well as use credit responsibly, you will remain in the same financial crisis you were in earlier.

Do You Meet The Requirements

Not everyone in Singapore can get a DCP. For you to qualify, you have to meet these requirements:

  • Be a Citizen or Permanent Resident

They aren’t accessible to foreigners.

  • Be Salaried

DCPs are open to salaried people who make an annual salary of about S$30,000 but not above S$120,000. This, however, depends on moneylenders or bank, since new customers will have to fulfill a higher minimum wages requirement. Your NPA has to be valued under S$2 million.

  • Hold Unsecured Debts that are at Least 12 Times the Monthly Income

This plan is designed for individuals who are knee-deep in unsecured debts. You also need to hold as a minimum 12 times your wages for each month of debt on your credit cards, other unsecured loan facilities and personal loans. Remember that some unsecured loans types such as business and education loans don’t qualify for DCP.

Before taking out one, ensure you prepare your loan and credit card statements. You also have to obtain a confirmation letter that shows all your unpaid balances.

Confirm The Interests

Evaluate all the unsecured loans and their rates, and make a comparison to the interests and loan period of DCP you intend to take out. Generally, the longer period of the DCP, the smaller your monthly payments will be. The deal here is that the interest rate is higher. A short-term loan has lower interests, but higher repayments for each month. It’s practical for you to take out DCP when it helps you be rid of your debt while you pay less interest.

Let’s say your outstanding debts on four credit cards, attracts each an interest of 25% each year. In such a case, you will be saving lots of cash on interest when you take out Citi’s DCP, which attracts an interest of 10.5% per year.

However, when your outstanding debts are spread across a number of personal loans that have an effective interest of below 10.5% a year, you might not require a DCP. Provided that you are able to manage the accounts by yourself, you don’t have to spend more money on the interest that comes with longer loan periods.

Compare Monthly Payments

Once you’ve made sure you qualify for the DCP, it is time to do your calculations. Confirm the amount you are paying at present for each month, and then compare it the amount of your DCP payment will be.

Check to confirm if the monthly payment of your DCP is 50% below what you are currently paying. If that is the case, it is helpful for you to obtain the DCP, because it will help free up some of your money for some savings and essential expenses.

On the other hand, having lower monthly payments will mean that you are stretching your loan time. Thus you will be paying more interest during the loan period.

How A DCP Can Help

Debt consolidation scheme is a brilliant financial tool for individuals who seriously want to overcome their outstanding unsecured debt for all time. Managing several debts with a DCP becomes easier and less costly. When you use the right plan, you will be able to lower the interest payments thus repay your loans and credit cards bills as effectively as possible.

Besides assisting you in managing several debts, a DCP has features that can ease your financial weight of repayments in case of emergency situations. A Debt Consolidation Plan has complimentary insurance coverage on a borrower’s outstanding debt under Singapore’s debt consolidation scheme totalling S$160,000. The benefits under the DCP policy will be repaid in case of a borrower’s Accidental Death, Involuntary Employment Disruption, and Total Permanent Disablement (based on the definition in the policy text).

This ensures that should an untimely death of the borrower through an accident or they get permanently disabled, the insurer will pay the remaining amount owed as stated under the DC Plan at that time, totalling a maximum amount of S$160,000. In case of the borrower’s Involuntary Employment Disruption, the insurer has to pay the minimum amount due and owed by a borrower. This is stated in the DCP’s statement of account. The insurance company pays up to a maximum period of 6 months.