What is a Debt Consolidation Plan And How Does it Work In Singapore?

It’s tough keeping up with overdue payments on a single credit card, but it gets even worse when you’ve fallen deeply into debt with several creditors. There are too many due dates and payments to keep track of, and the steady stream of reminders about your outstanding balance only adds more stress. The more you fall behind, the larger your debt becomes. 

Under these circumstances, debt consolidation plans can help.

A Debt Consolidation Plan (DCP) is a debt management tool that allows you to combine all existing credit card debts and personal loans into a single loan with a lower interest rate. The loan is then repaid in automatic monthly payments, much like a personal instalment loan, for a period of up to 10 years.

The DCP was announced by the Association of Banks in Singapore (ABS) in 2017, and is designed specifically for Singaporeans and Permanent Residents who are juggling several high-interest unsecured debts and have difficulty meeting payments.

A DCP is usually recommended only if you have an outstanding debt that is more than 12 times your monthly salary. For smaller debt amounts, a balance transfer or personal instalment loan may be better alternatives.

Let’s take the example of Jonathan, who has a monthly salary of S$3,000 and a current outstanding balance of S$40,000 between 1 personal loan and 3 credit cards from different banks.

Jonathan is barely keeping up with the minimum payment of S$1,275 a month – nearly half his monthly salary. His total outstanding balance is also more than 12 times his monthly salary.

At this rate, he is paying around S$9,336 in interest alone per year. Because the interest rate on credit card debt compounds on the remaining balance, it will take him over a decade until he clears his debts completely.

A debt consolidation plan can combine all these unsecured loans into a single loan. Essentially, the bank providing the DCP will buy out Jonathan’s outstanding balances, fees, and charges payable from his credit cards and loans – even if they are from different banks. These accounts will then be closed or temporarily suspended.

Jonathan will then have to make monthly payments to the bank that provided the DCP until his debt is fully cleared.

Let’s assume that Jonathan can get a debt consolidation plan from HSBC payable over 8 years, with a flat interest rate of 4.2% p.a (EIR from 7.5% p.a). Here is how much he would be paying per month, compared to his current commitments:

These figures have been simplified for illustrative purposes. Actual figures may vary depending on your situation and the bank's rates.

With a DCP, Jonathan's monthly repayments become more manageable. If he can pay this monthly amount on time, he can be free from all these loans in 8 years and save nearly S$60,000 on interest payments alone.

No. The funds that you get from the Debt Consolidation Plan will be disbursed directly to the respective financial institutions with whom you have unpaid, outstanding unsecured credit facilities.

The DCP funds cannot be deposited into your designated savings or current account.

DCP is only for unsecured credit facilities like credit cards, personal loans, and credit lines. 

However, certain kinds of unsecured loans are not eligible, such as education loans, renovation loans, joint accounts, medical or business loans, and credit facilities for businesses. 

Secured loans like car loans or housing loans cannot be consolidated under a DCP.

Generally, banks will lend you a DCP amount equivalent to the total outstanding balance you owe, including any other fees or charges you accrued, as written in your statement of accounts.

There might be some instances where your approved DCP amount won’t be enough to repay your outstanding balances. If this is the case, you will be responsible for paying the balance directly to the financial institutions you borrowed from.

Your first DCP will also provide an additional 5% allowance above the total DCP amount. This should help you deal with incidental charges you might have incurred from the time the DCP got approved until the time the DCP funds get received.

The 5% allowance will be given directly to the financial institutions you borrowed from, and cannot be deposited into your savings or current account.

In case there is any amount left over from the 5% allowance, the excess amount will be refunded or credited back to you.

Debt consolidation plans are only available to Singaporeans and Permanent Residents.

To qualify, you must be a salaried employee with an annual income between S$30,000 and S$120,000. You must also have interest-bearing outstanding balances on unsecured credit facilities amounting to a minimum of 12 times your monthly income.

You can only have one DCP active at any one time. After three months, you can refinance your existing DCP with another participating bank, if you find one with lower interest rates.

There are also perks to refinancing your DCP with a different bank. For example, you can refinance your DCP with Standard Chartered and get 6% cashback. This promotion is valid till 30 September 2021.

That said, before you refinance, check with your original DCP financial institution if you would be subject to any penalty fee for terminating the DCP prematurely.

It’s important to note that once you are enrolled in an active DCP, you cannot apply for a new credit card or loan until your outstanding debt is less than 8 times your monthly salary. This allows you to stay focused on clearing out your debts.

Debt consolidations plans are currently available at 14 participating financial institutions (FI) in Singapore:

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

You can apply for a DCP from any financial institution of your choice, even if you don’t bank with them yet. It is important to note that each financial institution will have their own terms, conditions, and rates for DCPs.

We suggest comparing debt consolidation plans before you push through with the institution of your choice, to make sure you’re signing up for a payment plan with interest rates that suit your financial situation.

Standard Chartered’s Debt Consolidation Plan currently offers the lowest interest rate in the market of 3.48% p.a (EIR from 6.33% p.a) with a loan tenure of up to 10 years. It allows you to consolidate all your credit cards and unsecured loan balances while enjoying attractive benefits such as receiving 6% cashback when you refinance your existing DCP from another bank with Standard Chartered. Keep in mind that the interest rate offered to you is based on your personal credit profile and may differ from the published rate. 

Before applying for any debt consolidation plan, make sure you have the following documents ready:

• Photocopy of your NRIC (front and back)
• Latest Credit Bureau Report
• Latest Income Documents
• Latest credit card and unsecured loan statements
• A confirmation letter that shows unbilled balances for your unsecured credit card and instalment plans

There are 14 financial institutions that offer a DCP in Singapore. Before applying for one, compare interest rates and find a plan with the lowest one. 

In general, the longer the loan tenure, the more interest you will pay over the lifetime of the loan. You’ll want to make sure that you’re getting the lowest rate possible.

Some DCPs are bundled with welcome offers such as promotional interest rates, cashback, and other money-saving features. While you shouldn’t choose a financial product for the welcome gifts alone, these money-saving extras make it easier to decide between two equally promising DCPs.

Keep in mind that the interest rate offered to you is based on your personal credit profile and may differ from the published rate.

All in all, a debt consolidation plan is a useful tool for managing multiple high-interest debts. If you have several outstanding credit card bills and personal loans, a DCP can help you pay these off, leaving you with just one monthly payment and saving you money with lower interest rates.

If you cannot qualify to get a DCP due to citizenship or outstanding unsecured debt requirements (i.e. your outstanding debt that is less than 12 times your monthly salary), you still have the option of getting a personal loan to pay off your high-interest debt.

Make sure that you use the personal loan to pay off your credit card bills and other high-interest debt the moment the funds are disbursed. Do not squander it away!

While you're at it, make sure you make monthly repayments punctually to pay down this personal loan.

Needless to say, do your best to not overspend and avoid incurring additional debt!