Singapore’s growing debt consolidation trend

[SINGAPORE] In Singapore, individuals burdened with multiple unsecured debts can streamline their financial commitments through Debt Consolidation Plans (DCPs). These plans amalgamate various debts into a single loan with a fixed repayment schedule, potentially offering lower interest rates and enhanced financial clarity.

A Debt Consolidation Plan is a financial solution that allows individuals to merge all their unsecured credit facilities—such as credit card debts and personal loans—across different financial institutions into one consolidated loan with a participating bank. This approach simplifies debt management by reducing multiple payments to a single monthly installment.

Eligibility Criteria

To qualify for a DCP in Singapore, applicants must meet the following criteria:

• Citizenship: Must be a Singapore Citizen or Permanent Resident.
• Age: Between 21 and 65 years old at the time of loan maturity.
• Income: Annual income ranging from S$20,000 to S$120,000.
• Debt Threshold: Total interest-bearing unsecured debt exceeding 12 times the monthly income.
• Net Personal Assets: Assets minus liabilities should be less than S$2 million.

It's important to note that certain unsecured loans, such as business-related credit facilities, education loans, renovation loans, and medical loans, are excluded from DCP eligibility.

How Do Debt Consolidation Plans Work?

Upon approval, the chosen financial institution settles the outstanding balances of your eligible unsecured debts. In return, you commit to repaying the consolidated loan over a fixed tenure, typically ranging from 3 to 10 years, with a predetermined interest rate. This structure provides predictable monthly payments and can lead to interest savings.

Benefits of Debt Consolidation Plans

• Simplified Payments: Consolidates multiple debts into a single monthly payment, reducing the complexity of managing various due dates and amounts.
• Potential Interest Savings: Offers the possibility of lower interest rates compared to existing debts, leading to overall interest savings.
• Improved Financial Management: Provides a structured repayment plan, aiding in better budgeting and financial planning.

Considerations Before Opting for a DCP

• Suspension of Existing Credit Facilities: Participating in a DCP requires the suspension of all existing unsecured credit facilities. This means you cannot use your credit cards or take on new unsecured debts during the repayment period.
• Processing Fees: Some financial institutions may charge a processing fee, which can vary among providers. It's essential to compare fees and interest rates across different institutions to find the most suitable plan.
• Impact on Credit Score: While consolidating debts can improve your credit score by reducing your credit utilization ratio, initially applying for loans from multiple lenders may cause a temporary dip. However, consistent and timely repayments can enhance your credit profile over time.

Participating Financial Institutions

As of 2024, 17 financial institutions in Singapore offer Debt Consolidation Plans:

1. American Express International, Inc.
2. Bank of China Limited Singapore
3. CIMB Bank Berhad
4. Citibank Singapore Limited
5. DBS Bank Ltd
6. Diners Club Singapore Pte Ltd
7. GXS Bank
8. HL Bank
9. HSBC Bank (Singapore) Limited
10. Industrial and Commercial Bank of China Limited
11. Maribank Singapore Private Limited
12. Maybank Singapore Limited
13. Oversea-Chinese Banking Corporation Limited
14. RHB Bank Berhad
15. Standard Chartered Bank (Singapore) Limited
16. Trust Bank
17. United Overseas Bank Limited

Each institution offers unique terms, interest rates, and benefits. It's advisable to research and compare these offerings to identify the plan that aligns best with your financial situation and goals

Application Process

The application process generally involves:

Submission of Application: Complete the application form and provide necessary documents, including proof of income, credit bureau report, and bank statements.

Approval and Fund Disbursement: Upon approval, the financial institution will settle your outstanding eligible debts and inform you of the new loan details.

Repayment: Begin repaying the consolidated loan according to the agreed-upon terms.

It's important to note that you can only have one active Debt Consolidation Plan at any given time. However, after three months, you may consider refinancing your existing plan with another bank if a more attractive package becomes available.

In response to rising consumer debt levels exacerbated by inflation and economic uncertainties, the Monetary Authority of Singapore (MAS) has encouraged financial institutions to continue promoting responsible lending practices, including the offering of DCPs. According to MAS data, the average credit card debt per consumer increased by 4.2% in 2023, highlighting the growing relevance of consolidation schemes for financial relief.

Consumer advocacy groups have also weighed in on the growing popularity of DCPs. The Credit Counselling Singapore (CCS) reported a 15% rise in individuals seeking help with debt restructuring last year. CCS emphasizes the importance of financial literacy and budgeting alongside formal debt solutions, cautioning that consolidation plans are not a cure-all but a strategic tool for regaining control over finances.

Industry experts note that the DCP framework in Singapore is robust, offering consumers legal protection and standardized terms under the guidance of the Association of Banks in Singapore (ABS). However, they also point out potential improvements, such as incorporating more flexible repayment options for individuals facing unexpected life events, including job loss or medical emergencies.

A recent initiative by financial institutions includes digital tools to enhance transparency and accessibility of DCPs. Several banks have launched online platforms that allow potential applicants to simulate repayment scenarios and compare plans across institutions. This shift toward digital engagement is particularly significant for younger consumers who prefer managing finances through mobile apps and online portals.

Debt Consolidation Plans in Singapore offer a viable solution for individuals struggling with multiple unsecured debts. By consolidating debts into a single loan with favorable terms, borrowers can simplify their financial obligations and potentially reduce overall interest payments. However, success with a DCP depends on financial discipline, timely repayment, and a clear understanding of the terms involved.