Should You Take a Personal Loan for Debt Consolidation, or Use a Debt Consolidation Plan Instead?

Personal loans can be a great way to solve temporary financial issues or to pay for high-value items for which we do not yet have the cash. However, not managing personal loans properly can cause us to accrue debt at an unexpectedly fast rate, due to the compounding effect of interest charges. 

When debt piles up to a point beyond our ability to pay, it may seem hopeless. But before you give up, know that you can make use of a debt consolidation plan to help you out. Let’s take a closer look at personal loans and debt consolidation plans, and how they work with each other. 

What is a personal loan?

A personal loan is a financial tool that helps you afford large purchases or to tide over temporary gaps in cash flow. 

It is a sum of money borrowed from a bank or financial institution at an agreed interest rate and loan duration (aka tenure). A personal loan is paid back in monthly instalments, which continue until the entire loan is paid off. This includes the sum borrowed (aka principal) and the interest levied on the loan. 

Personal loans do not require collateral. That’s to say, borrowers do not need to put up assets or items of value in order to get the loan. Hence, personal loans are unsecured credit facilities.

How much can you borrow from a personal loan?

You can choose how much you want to borrow, and for how long – provided they are typically within the following limits:

• Up to 4x your monthly income (if annual income less than S$120,000)
• Up to 10x your monthly income (if annual income more than S$120,000)
• Loan tenure from six months to seven years (depending on bank)

What is the interest rate on personal loans?

Your loan will be subject to an interest rate determined by the bank, based on your credit score and your borrower profile. Currently, personal loans in Singapore range from 2.68% p.a. (EIR 5.43% p.a.) to 3.45% p.a. (EIR 6.5% p.a.).

Note that when comparing personal loans, you should check the Effective Interest Rate (EIR). This is because EIR reflects the true cost of borrowing giving you a clearer picture.

What are the qualifying criteria to get a personal loan?

Age and income 

Generally, you will need to fulfil the following age and income requirements when applying for a personal loan:

• 21 to 70 years old
• Minimum annual income of S$20,000 
• Singapore citizen or PR, or foreigner with valid Employment Pass

Credit score and level of indebtedness

Your credit score is an important factor when applying for a personal loan. Credit scores indicate your creditworthiness, based on how well you managed past loans and financial obligations. 

If you have a low credit score, you are deemed to be a greater credit risk to the bank. This means your interest rate is likely to be higher. If your credit score is too poor, your loan may even be rejected altogether. 

Another factor to consider is your current level of indebtedness. Under the Monetary Authority of Singapore (MAS) rules, you may not take on further personal loans if your total interest-bearing outstanding balance on unsecured credit facilities exceeds 12x your monthly income for three consecutive months. 

Best personal loans in Singapore

Personal loan	Interest rate	Tenure	Processing fee	Maximum loan amount
CIMB Personal Loan Apply Now	From 2.80% p.a.  (EIR from 5.28% p.a.)	1 to 5 years	1% for amounts less than S$5,000	Up to 2X monthly income (for annual incomes S$20,000 to S$29,000) Up to 4X monthly income (for annual incomes between S$30,000 to S$119,999) Up to 8X your monthly income, capped at S$200,000 (for annual incomes above S$120,000)
Citi Quick Cash Loan	From 3.45% p.a.  (EIR from 6.5% p.a.)	1 to 5 years	nil	Up to 4X your monthly income
DBS Personal Loan Apply Now	From 2.68% p.a.  (EIR from 5.43% p.a.)	6 months to 5 years	1%	Up to 4X your monthly salary (or 10X your monthly salary if your annual income is above S$120,000)
GXS FlexiLoan	From 2.99% p.a.  (EIR from 5.65% p.a.)	2 months to 5 years	nil	Up to your credit limit
HSBC Personal Loan Apply Now	From 2.92% p.a.  (EIR from 5.50% p.a.)	1 to 7 years	nil	Up to 4X your monthly income (capped at S$100,000)
OCBC ExtraCash Loan  Apply Now	From 5.43% p.a.  (EIR from 11.47% p.a.)	1 to 5 years	Annual income from S$20,000 to S$20,999: S$100  Annual income S$30,000 or more: 2%	Up to 6X your monthly income
Standard Chartered CashOne Personal Loan Apply Now	From 2.88% p.a. (EIR from 5.84% p.a.)	1 to 5 years	S$199 for first year, S$0 for subsequent years if no late payments	Up to 4X your monthly income
UOB Personal Loan Apply Now	From 2.88% p.a.  (EIR from 5.43% p.a.)	1 to 5 years	nil

What is a debt consolidation plan?

A debt consolidation plan (DCP) is a debt management tool that is offered to heavily indebted persons to help them pay off overwhelming debt from unsecured credit facilities, such as credit cards and personal loans. It is a last resort before bankruptcy.

Unsecured credit tends to have high interest rates which compound on a daily basis. This can build to a point where debtors are barely able to keep up with monthly interest payments, let alone make any meaningful progress towards clearing their debt. 

DCPs work by consolidating all your unsecured debts into one account, and significantly lowering your interest rate on your debt. This makes it easier to repay your debt, as you can now clear off more of your principal sum owed each month, while possibly enjoying lower monthly payments.

Once your DCP is approved, you will be given a credit card with a credit limit equal to one month of your income. This is to help you manage your everyday expenses. 

How much can you borrow from a DCP?

If you are approved for a DCP, the amount borrowed will be equal to the total of your outstanding unsecured debt. 

There’s a 5% extra allowance on top of that to cater for any incidental charges. 

What is the interest rate on DCPs?

DCPs in Singapore are offered at interest rates starting from 3.48% p.a (EIR from 6.33% p.a.) to 4.50% p.a. (EIR from 8.22% p.a.). Note that these are minimum advertised rates, and you may be offered higher interest rates.

As with personal loans, you should consider the Effective Interest Rate (EIR) when comparing between DCPs from different providers. This will give you a more accurate gauge. 

What is the qualifying criteria to apply for a DCP?

To apply for a DCP, you have to fulfil the following requirements. 

• 21 to 60 years old
• Singapore Citizen or Permanent Resident
• Annual income between S$30,000 and below S$120,000, or have net personal asset less than S$2 million
• Have total interest-bearing unsecured debt that exceeds 12x your monthly income

Debt consolidation plans in Singapore

DCP	Interest rate	Tenure	Processing fee
Citi Debt Consolidation Plan	From 3.80% p.a.  (EIR from 7.49 % p.a.)	Up to seven years	S$300
DBS Debt Consolidation Plan	From 3.58% p.a.  (EIR from 6.56% p.a.)	Up to eight years	S$99
HSBC Debt Consolidation Plan	From 4.2% p.a.  (EIR from 7.5% p.a.)	Up to 10 years	1% of approved loan amount (min. S$88)
OCBC Debt Consolidation Plan	4.5% p.a.  (EIR from 8.06% p.a.)	Three to eight years	nil
Standard Chartered Debt Consolidation Plan	From 3.48% p.a  (EIR from 6.33% p.a.)	Three to 10 years	S$199
UOB Debt Consolidation Plan	From 4.50% p.a.  (EIR from 8.22% p.a.)	One to eight years	nil

Personal loan vs debt consolidation plan – which one should you use?

Personal loans and DCPs are meant to fulfil distinct functions, and for all practical purposes, there is a choice between one or the other. 

This is because of the Debt-to-Income (DTI) ratio, which is set at 12x your monthly income. You can only apply for a DCP once your DTI has been exceeded, and not before.

However, by the time your total unsecured debt is more than 12x your monthly income, you can no longer apply for additional unsecured credit facilities, such as personal loans. 

Therefore, you should consider personal loans and DCPs separately. If you are under the DTI threshold of 12x monthly income, consider using personal loans or balance transfers to pay off your debts with higher interest, such as credit cards. 

But if you have exceeded your DTI, then it’s time to consider getting a DCP to lower your interest and improve your ability to repay your debt.