Whether you borrowed money to purchase a new house or pay for a holiday, debt happens and can rapidly spiral to high-interest rates and tough-to-manage monthly bills. While this can, at times, be inevitable, what counts more is how you handle the debts. As recently as 2017, about 4,000 Singaporeans took unsecured debts that surpassed 12 times their regular monthly income. This number is likely to have skyrocketed in 2020 because of the COVID-19 pandemic, which left trails of financial damage to businesses.
Debt consolidation is one of the top options that can simplify managing multiple debts by rolling them into a single payment plan. When compared to the aggregate cost of repaying individual debts, you will find that taking out a debt consolidation plan has a lower interest rate and can help to build a better credit score. This post is a comprehensive guide to help you apply for a debt consolidation plan in Singapore and to check your debt collection plan eligibility, we ultimately help you answer the main question, “Can debt consolidation plans help me reach financial freedom?”.
What is a Debt Consolidation Plan and How Does it Work?
In Singapore, a debt consolidation plan is used as a method of assisting Singaporeans and permanent residents who are trying to juggle several high-interest debts but find it challenging to meet the expected payments. It's key to financial freedom. It is important to note that debt consolidation plans are only used for unsecured credit facilities, such as credit lines, personal loans, and credit card loans, as opposed to secured credit.
To be eligible for a debt consolidation loan, you need to have debt that is more than 12 times your monthly salary. When you apply for the consolidation loan, the bank provides funds equivalent to the outstanding balance that you owe. This amount includes applicable fees and charges that have accrued as a result of the debts.
In some cases, the bank might approve a debt consolidation plan that is less than the requested debt consolidation amount. In such a situation, you will be required to pay the balance directly to the financial institution that you had borrowed from.
Your first debt consolidation plan will also include an additional 5% above the total debt consolidation amount. The additional amount is used to deal with possible charges that you might have incurred between the time the debt consolidation plan was approved and when the money got received. The 5% allowance is given directly to the institution that you had borrowed money from, and cannot be deposited into your checking account.
Once your multiple debts are settled, you now commence paying a single loan with a lower interest rate. To demonstrate how a debt consolidation plan in Singapore works, here is an example:
An individual who has multiple unsecured debts is forced to make monthly payments of $1,000. In addition to the actual cost of the loans, the amount includes additional fees, which also have to be paid every month. When the individual takes up a debt consolidation plan, all the loans are rolled into one, helping the borrower to cut down the monthly payment to $650 per month.
Although the debt consolidated plan tenure might be longer, it allows the borrower to make lower monthly payments. In addition, the borrower is liberated from high-interest rates and also gets peace of mind because he will not have to deal with multiple collection agencies.
Since the reduced monthly payments are easier for the borrower to meet, he ends up building a better credit score over time.
Special Benefits of Using Debt Consolidation Plans
If you are suffering from the burden of multiple debts and have decided to use a debt consolidation plan in Singapore, here are the main benefits that you should anticipate.
1. Ability to Turn Multiple Debts into a Single Payment
In life, people take loans to be able to invest in different things. If the multiple loans, alongside credit card debts, have varying interest rates, you are likely to be paying way higher than you should. A debt consolidation plan makes paying these debts simpler and might even reduce the monthly payments because of the longer loan tenure.
If part of the debt came from multiple credit cards, wrapping them into a single debt consolidation plan will feel like a huge burden has been taken off your shoulder. Although it is true that the debt has not gone away, the multiple payment deadlines will be no more. So, you will only have to deal with a single debt source.
This is especially helpful if you have multiple debts. As some require payment early in the month and others later, it can be challenging to keep up with the schedule. If you add daily chores at your workplace and other personal engagements, there is a risk of forgetting or being late with some of the payments. Remember that such delays come with serious penalties and damage to our credit score.
2. Consolidated Loans Helps to Lower Interest Rates
Most unsecured debts, such as credit cards, have very high-interest rates that significantly add to your debt burden every month. By clearing off these multiple high-interest rate accounts and combining them into a single debt consolidation plan, you will be able to secure lower interest rates on the new single account.
When it comes to loans, especially unsecured ones, the credit score is an important factor in defining the interest to anticipate after consolidating the debt. After taking up a debt consolidation plan, you significantly improve your personal credit score, and it is possible to reduce the interest rate with a significant margin. This will be a good way to start making some savings that would have otherwise been impossible when working with multiple debts.
3. A Sure Way to Improve Your Credit Score
If you are paying multiple debts, juggling different deadlines can result in late payments and defaults. The overall impact is a poor credit score which can compromise your ability to access credit in the future. However, debt consolidation plans can overturn the tables by giving your credit score a nice boost.
If you take a personal loan to consolidate other debts, the immediate implication is likely to raise the score in a couple of months because you will be reducing the credit utilisation ratio.
Note that immediately after taking a debt consolidation plan in SG, the credit score might dip slightly. However, you will start seeing the positive impacts in the coming months. In the long term, the boost to your credit score will be incredible. This could be the starting point of your journey to financial freedom.
4. Less Stress of Dealing With Multiple Creditors
If you talk to people with multiple debts, most of them are likely to be stressed. We agree with them that dealing with multiple creditors, managing different deadlines, and fast declining credit scores alongside daily chores can be exhausting. It can be pretty stressful and affect your personal life and productivity at work (what is the cost of living in Singapore?).
However, a debt consolidation plan can take away all the stress. By taking control of your finances through a debt consolidation plan, it is easy to stay on top of every monthly payment. Now, you only have to deal with a single monthly payment, which is a lot more convenient than five or more. You can even ask your bank to always remit the payment money at a specific date to make following the loan schedule easy. The fact that you will end up in a better financial position is even more satisfying.
5. A Debt Consolidated Plan is a Perfect Way to Clear Loan Faster
Credit card balances can have years to go before getting paid off in full. Indeed, these credit cards earn interest on the amount that you owe and banks do not mind much if you take five or ten years to clear the debt. One of the main benefits of debt consolidation plans is that the process factors a number of things, including credit score, the length of the loan, and the amount owed, to draw the best plan for you. As a result, debt consolidation plans in Singapore come with a shorter payback time frame, which implies that you can finally anticipate a life without debts.
6. Less Risk of Collateral Repossession
When looking for a method of cutting down the interest rates on loans, some banks might advise you to offer an asset, such as a car or house, to serve as collateral. Although it works, there is a serious danger of getting your collateral repossessed. Therefore, you should avoid going this route as much as possible. Instead, you should go for a debt consolidation plan.
A debt consolidation plan involves taking an unsecured loan to clear the current debts and rolling them into a single monthly payment. With debt consolidation plans in SG, you do not have to put forward collateral to roll the current loans into one. See – there is no need to risk your house or car, but you still get to pull down the interest rates and make repaying the debts easy.
What You Need To Understand About Debt Consolidation Plans
Getting a debt consolidation plan will be an excellent thing because it allows you to enjoy all the benefits we have listed in this post. It is also very important to understand the following concepts:
Loan interest rate: This is the cost of a loan. The moment the debt consolidation plan is approved, you will be required to repay the debt consolidation plan plus the interest.
Amount payable: This is the total amount that you will have paid by the end of the loan limit. It includes the loan (principal), the interest rate, and all applicable fees. If there are some penalties along the way, they will also be included.
Loan term: This is the period when you are expected to clear the loan. Note that the faster you can clear the loan, the less the amount payable will be. If you pick a longer period, the amount payable every month will be low, but the overall amount payable will be way higher compared to repaying the same loan in a shorter period.
Crucial Dos and Don’ts with Debt Consolidation Plans
Debt consolidation plans have been demonstrated to be a good way of dealing with multiple lines of credit, but you also need to be careful with the selected plan to be successful. Here are some crucial dos and don’ts that you need to be aware of when going for a debt consolidation plan.
Compare and Identify the Consolidated Plan with Lowest Interest Rates
As we have highlighted, using debt consolidation entails taking another loan. Therefore, it is crucial to compare the interest rates and only pick the plan with the lowest one. When checking the loan’s interest rate, it is also crucial to appreciate that it is dependent on the loan tenure. A loan with a longer tenure will cost you more compared to another with a shorter tenure.
Debt consolidation plans in Singapore are offered by providers who might have additional features to help clients save money. So, make sure to also check out for extras, such as promotional rates and complimentary insurance. Although these extras should not be the primary factors when selecting a debt consolidation plan, they can make it easier for you to decide between two potential DCPs.
Do Change Your Spending Habits
A debt consolidation plan is designed to simplify how you pay off multiple loans, helping to take out juggling multiple bills and beating the due dates. However, we must say that this is only one side of the coin. To maintain a debt-free status, it is crucial to change your behaviour.
Find ways of cutting down spending and supplementing your income. For example, if you go on holiday three times every year, slashing them to one or two can help to free some money for debt repayment. You might also consider taking a part-time job to raise additional money to boost your savings.
Consider adopting these changes as part of your new financial habits even after paying the consolidated debts to increase personal savings. Furthermore, you need to regularly review your progress to be sure that the targeted objectives are being achieved.
Don’t Miss a Payment when Repaying Your Debt Repayment Plan
When you go for debt consolidation plans in SG, it is important to take it like other loans and put a lot of emphasis on monthly instalments. If you miss these payments, it is very easy to undo the positives that you had accrued over time. Missed payments will not only attract penalties but can also start pulling down the credit score that you had started improving.
To avoid being late or forgetting to repay the monthly instalments, there are two things that you can do. One, you can automate the payments so that they are always done on time. Two, you should review personal spending to shed off unnecessary expenditures. For example, you might consider using public transport for three days of the week instead of driving. Then, direct the extra cash to clear the debt consolidation plan.
Don’t Fall for Big Promises
When debts get too much for some people, they tend to hastily pick any plan tagged with big promises. However, you need to be careful with such "too-good-to-be-true" promises. For example, a debt repayment company that promises that you will become debt-free in only a few months after selecting a debt consolidation plan will be lying.
A good debt consolidation plan will require a lot of focus and commitment from your side. Because you have taken another loan, it is important to be prepared to carefully follow the rules, especially the monthly payments, until the last instalment. So, do not spare any effort that can improve your financial situation, especially in developing additional streams of revenue. These efforts will not only help you clear the loan faster, but also create a better financial future.
Don’t Go for a Debt Consolidation Plan without Understanding How You Got There
While it is true that using debt consolidation plans in Singapore is a great way to get out of debt, failing to understand how you got there will be a great mistake. For example, if the bulk of your debt soared because of excess spending, there is a risk of creeping back into old habits and getting into financial trouble. So, was the debt problem caused by overspending, high-interest rates on loans, or an emergency that crippled your source of income?
At this point, it is important to also get inspiration from other people who managed to overcome debts using debt consolidation plans. Reading their stories to learn how they did it, pick useful lessons, and note the mistakes to avoid.
Debt Consolidation Plan Eligibility in Singapore: How Do I Know if I Qualify?
Debt consolidation plans in SG are only available to citizens and permanent residents. In addition, you are required to have a stable income of between $30,000 and $120,000. Besides, the outstanding balances on your unsecured loans should be more than 12 times your monthly earnings.
Another requirement for debt consolidation plan eligibility that you need to know about is that you can only have one debt consolidation plan at any moment. If you opt to refinance your debt consolidation plan, some banks in Singapore might be willing to offer some cashback.
After enrolling in a debt consolidation plan, you will not be able to apply for a new loan or credit card until the outstanding debts fall to manageable levels. Most banks demand that the debt should reduce to less than eight times your monthly salary.
How to Identify a Good Debt Consolidation Plan in SG
Now that you know the benefits of using a debt consolidation plan as well as the main dos and don’ts when handling it and eligibility criteria, it is time to identify the best bank. So, here are the main things to look for when searching for the best consolidated loan provider.
The Provider Should Have a Simple Application Process
When people turn to banks for debt consolidation plans in Singapore, most of them are already reeling from intensive stress. The best bank should offer a seamless process so that you can easily get the expected help with multiple debts. With Lendela’s help, you will be able to compare the different banks that have offered you a debt consolidation plan, as well as their procedures. This gives you a good foundation before you decide which bank to go with.
Commitment to Helping Borrowers Overcome their Debts
Most people fall into the abyss of debt because of poor financial management. For example, instead of borrowing only what they need, they take the maximum that the bank has to offer. A good debt consolidation financial services provider should be committed to helping borrowers develop good personal finance management skills. Here is where Lendela comes in. To us, your financial situation is our number one priority, and we are here to help you improve your personal finances.
We are committed to helping borrowers develop good financial habits and are happy to walk with them on the journey of discovery. Our goal is to help borrowers understand the mistakes they made and how to avoid them in the future. These new skills can be impacted through talks with our Customer Service Team, by reading our financial guides (like this one) and newsletters, and by looking through our website.
Have Multiple Financial Products
When you take a debt consolidation plan in Singapore, you are required to avoid taking further loans or new credit cards until the debt reduces to less than eight times your monthly income. After cutting down the debt to this level, you will want to start taking loans again, but more responsibly. Therefore, a good debt consolidation plan service should have multiple loan products, such as renovation loans, personal loans, student loans and wedding loans, so that you can continue using it in the future.
Allows for Consolidated Debt Loan Refinancing
When you select a specific debt consolidation plan with a selected bank, your credit score is likely to improve in the subsequent months. This means that you are no longer a high-risk party that the banks knew when you had several debts. Therefore, a good bank should be ready for consolidated debt loan refinancing so that you can enjoy lower interest rates.
Affordable Interest Rates
One of the main reasons that make multiple debts, especially credit card-based loans, expensive is high-interest rates. Therefore, the selected debt consolidation plan should have lower interest rates to help reduce the monthly payments and total amount repayable (TAP). Make sure to compare interest rates offered by different banks, and only pick the plan that comes with the lowest rates. As always, Lendela is here to help you with this step.
Do not Fall for these Debt Consolidation Plan Myths
While the benefits of using debt consolidation plans are indeed clear, there are so many myths online, and it is important to know and avoid them. Here are the main ones:
Debt Consolidation Plans Works for All
While a debt consolidation plan can be a good stepping stone to help you wrestle debts down, it does not work for all. Because it is a loan, you are still adding the load of the total amount required to be paid. Therefore, if you are unable to control your borrowing, this plan might not be of great help.
The best way to make a debt consolidation plan work for you is by developing good financial discipline. For example, you should try to establish why you fell into the problem of too many debts and avoid a repeat of a similar situation. If it proves challenging, consider seeking assistance from an expert.
A Debt Consolidation Plan Does Not Affect Your Credit Score
This is another common misconception about debt consolidation plans in Singapore. The truth is that, like other types of credit, the loan you take under the debt consolidation plan will also affect your score. When you take the debt consolidation plan, the score is likely to dip slightly at first because of the calculation method applied by the Credit Bureau of Singapore.
Because you have already cleared most of the debts using the debt consolidation plan, the score will start to improve with time. Indeed, this improvement is likely to continue if you stick to regular monthly payments as agreed with the bank. By the time you are through clearing the loan, your credit score is likely to be very high.
We must also indicate that the plan can also pull down the credit score if you fail to repay the loan on time. For example, if you are always late with the monthly repayment, there is a risk of being slapped with serious penalties and your credit score falling sharply.
The Process of Applying for a Debt Consolidation Plan in SG is Long and Complicated
This is another misconception that people have about debt consolidation plans. The main reason why people find it challenging to get a debt consolidation plan in Singapore is when they try to make the application on their own. Imagine having to sift through all the loan providers in Singapore, their terms and conditions, and dozens of papers to prepare before making an application. But you can make the process simpler by working with a loan comparison site.
You can Consolidate All Types of Loans
Well, this is untrue. In Singapore, not all debts can be rolled under a debt consolidation plan. You can only consolidate unsecured loans. However, all secured debts, such as mortgages and car loans, cannot be included in the plan.
Depending on the bank you go to for a debt consolidation plan, the amount approved might not be enough to cater for all debts. You will be required to dig deeper into the pocket to meet the additional cost of consolidation in such a situation.
Debt Consolidation Plans Will Instantly Get You Out of Debts
This is incorrect. When you pay multiple and high-interest debts using a debt consolidation plan, you do not get out of debt. Indeed, the overall debt load goes up significantly because you have taken another loan.
Although you get a more simplified method of paying, the debt is still there and will take some time to clear. Therefore, you can only be sure of being debt-free once the debt consolidation plan is cleared. It is important to put every focus into repaying the loan to get out of debt and improve your credit score.
How to Apply for a Debt Consolidation Plan in Singapore
It all starts with the application. You can easily apply for a debt consolidation plan in SG at Lendela’s website, for free. Once you have submitted your application, here are the main steps to follow when applying for debt consolidation plans.
Prepare the Required Documents
Depending on which bank you decide to use for a debt consolidation plan, the required documents might vary slightly. However, most of the time, these documents are required by the majority of debt consolidation plan banks in Singapore.
Latest credit bureau report that indicates your credit score.
Photocopy of your NRIC (front and back).
Latest income documents (last three months).
Latest credit card and unsecured loan statements from your current loan providers.
A confirmation letter indicating the unbilled balances for your unsecured credit card and instalment plans.
Wait for your Debt Consolidation Plan Approval
The bank you select will review your debt consolidation plan application including the necessary documents, and if you qualify, you will be asked to sign the agreement. Lendela will help you schedule an appointment at the bank’s office for the signing and for the actual transfer to the debt consolidation plan. It is important to read the agreement carefully and plan how to adhere to all the rules. If there is something that is not clear, it is important to ask before signing the agreement.
Notably, most banks appreciate that some costs might be incurred between the time of loan approval and when the money hits your account. Therefore, the approved funds for the debt consolidation plan might be higher by a small percentage, about 5%. This addition is released to the loan provider.
Start Repaying for the New Consolidated Loan
Once the debt consolidation plan takes effect, the money will be used to clear the existing loans so that you can start paying a single loan. Make sure to stick to the agreed repayment terms and conditions in order to enjoy all the benefits that come with using a debt consolidation plan. After some time, draw the repayment path and check the progress of your credit score to see if it has improved significantly. If there are major changes, consider asking for debt consolidation plan refinancing.
What You Need to Do After Picking a Debt Consolidation Plan in Singapore
Once you get a good debt consolidation plan, consider that as the starting point. Indeed, a longer journey waits ahead because you will be disallowed from taking additional loans until your debts fall to manageable levels. So, here are the main things that you need to do:
Relook at Your Monthly Budget
The moment a bank approves your budget, it marks the start of the important journey of paying the debt consolidation plan. Therefore, it is very important to rethink your monthly budget, factoring in not just the debt consolidation plan but all other debt obligations, such as mortgage payments and regular utility bills.
If you find the budget is taking too much of the money, consider instituting some austerity measures. For example, instead of driving to and from work from Monday to Saturday, consider using public transport for several days and directing the funds to pay the debt consolidation plan. Other possible measures that you might consider are carrying your food instead of buying from the restaurant, cutting holidays to two instead of three, and changing your diet.
Avoid Falling Back into Debt
What pushed you into a long cycle of debt? If you can establish the cause of the current problem, it might be possible to avoid its recurrence. For example, did the current high-interest debts result from impulse borrowing through credit cards or poor payment planning?
The lovely thing about understanding the cause of a problem is that you are likely to be wiser. For example, you can consider building a bigger emergency fund to cater to unexpected costs without having to borrow more. It might also be a good idea to think of growing your revenue streams.
Target Improving Your Credit Score
Notably, most creditors always check the credit scores of clients to determine their creditworthiness. Therefore, it is a great idea to think of how to improve it in order to gain access to credit at a lower interest rate. Some good examples of methods to consider for improving your score include:
Checking your credit score report to check for errors and having them rectified: Some of these errors can be caused by omission or wrong data entry and can be rectified by pointing them out to the Credit Bureau Singapore.
Reduce the outstanding debts: If the total amount of debt under your portfolio is very high, reducing it can help to push down your score. For example, make sure to clear other debts, such as car loans, as you faithfully follow the debt consolidation plan.
Increase your credit mix: To give you a high credit score, Credit Bureau Singapore also requires you to have a healthy credit mix. So, if most of your credit is in the form of credit card loans, consider enriching it with other types, such as short loans, and ensure they are paid on time. For example, you can borrow a short loan and repay it in a few months to improve the credit mix and push up your score.
Taking a debt consolidation plan in Singapore is the first step to changing your life. With a good plan, you will not only clear the multiple debts but also significantly pull down the high-interest rates. More importantly, you will embark on a journey to boost your credit score. With a good debt consolidation plan provider, you are sure to emerge from your debts as a better financial manager. Do not let those piles of debts spell doom for you – use debt consolidation plans to march to success!
Apply for a Consolidation Loan Plan in Singapore Through Lendela
The benefits of using debt consolidation plans outlined in this post demonstrate it is a good way to regain control over your finances. However, applying for it can be challenging because there are so many debt consolidation plan providers in Singapore. Instead of trying to go through every loan provider and compare their conditions, consider using a professional loan comparison site, such as Lendela.
Lendela makes the process simple because you do not have to fill out a lot of forms or use many hours trying to get the application through. Here are the simple steps to use when applying for the loan through Lendela:
Visit the Lendela website to open an account and complete a short application form in only a few minutes.
Lendela will provide you with offers from different banks and financial institutions and help you to identify the best debt consolidation plan in SG.
You will be booked for an appointment to sign the debt consolidation plan.
Finally, sign the debt consolidation plan and start making a single monthly payment towards clearing it.
Do not let high-interest debts wreck down your financial health; you can regain control through debt consolidation plans. Make sure to work with Lendela to identify the best bank and debt consolidation plan with the lowest interest rates.