Sometimes referred to as a “DCP loan”, a debt consolidation plan makes things easier for you by combining all your outstanding credit card and personal loan debt, otherwise known as unsecured debt, from different banks into a single loan with just one bank.
This loan usually has a better interest rate than the individual debts and it is payable over a period of between 1 to 10 years.
It should be noted that a debt consolidation plan is only available for certain types of unsecured debts like credit cards and personal loans. Other types of unsecured debt such as business loans, education loans, and renovation loans are not eligible for debt consolidation.
Here’s a more in-depth explanation.
1. What is a debt consolidation plan?
Debt consolidation, as the term suggests, is the combination of all debts into one. Instead of struggling to pay personal loans, credit card debts, and other debts to different institutions that have different due dates and interest rates, participants of a DCP pay a single loan to one institution.
Once an unsecured credit facility has been consolidated, it should not be used since the additional amount used will not be consolidated. All such facilities should either be suspended or closed. To help participants of DCPs manage their daily expenses, most lenders give revolving credit facilities. There are no annual fees on these optional facilities for those under DCPs.
It is important to note that not all unsecured debt can be in a DCP. Education debt, renovation loans, and business loans still have to be paid off separately.
2. Benefits of DCPs
Convenience of only having to pay a single debt is not the only benefit participants of DCPs stand to get. Other benefits include:
- DCPs usually consolidate debts to one with a lower interest rate.
- A DCP allows for the extension of loan tenures. This is particularly important for credit card debts which usually attract a minimum monthly repayment of 3% of outstanding balance and late payment fees for failure to pay every month. This usually leads to a vicious cycle of debt. With a DCP, participants get to choose their preferred loan tenure for more manageable repayments.
- Financial freedom gives peace of mind and is also good for one’s health.
- For participants with a bad credit score, this is the first step towards a better score.
3. Who Qualifies for DCPs?
DCPs are not for everybody. The law (and individual lenders) set eligibility criteria that applicants must fulfil. These include:
- The applicant must be a Singapore citizen or a permanent resident (PR)
- The interest-bearing unsecured debt must be more than 12X the applicant’s monthly income
- The applicant must demonstrate ability to make the new monthly repayments
- The applicant must earn between $20,000 and $120,000 per annum and must have a net personal assets worth no more than $2 million
- The lender will require some documentation such as copies of the NRIC, the latest report from the credit bureau, credit card statements and other loan statements, and income slips.
- Confirmation letter as evidence of unsecured credit instalment plan unbilled principal balances where applicable
- When seeking DCP refinance, settlement notice from the previous debt consolidation bank
4. Who pays the creditors?
Once the DCP has been approved, the participating financial institution pays the outstanding amounts, including interest and fees/charges. The participating financial institution also informs the existing financial institutions of the suspension of the accounts.