The new Debt Consolidation Plan to help Singapore’s credit addicts
by Ryan Ong
EVERYTHING is faster and more efficient in the age of digital banking, including going bankrupt. When you consider you can get four times your monthly income in cash, in 15 minutes, it’s pretty amazing we’re all not stress eating caviar while looking at our monthly bills. For those without self-control though, the Association of Banks in Singapore (ABS) has made a help package – in the form of a new debt consolidation programme:
What is debt consolidation?
Debt consolidation is the process of using one big loan to pay off all your other loans. For example, say you owe $500 on one credit card, $7,000 on another, and $3,200 on a credit line. You also have a fixed instalment loan for $30,000.
Each of these loans accrue interest at different speeds. The credit cards have an interest rate of around 24 per cent per annum, the credit line is about 9 per cent per annum, and the instalment loan has an effective interest rate of around 8 per cent per annum. They all have different billing cycles, so apart from the mathematical headache, it’s hard to keep track of what you have to pay and when.
What you could do is take out a single colossal loan for $40,700, and repay all the aforementioned loans. Ideally, this huge loan would also have a lower interest rate than all the others. This way you just need to service a single loan, instead of worrying about all the different debts.
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Singapore’s new Debt Consolidation Plan (DCP)
The new DCP is an ABS initiative. Using this product, you can get a single huge loan from a participating bank, and use it to pay off your outstanding debts. You can borrow up to the total outstanding balance on your personal loans*, plus an allowance of around 5 per cent of this amount (the 5 per cent is provided because there may be administrative charges when using the DCP to pay off your other loans).
The DCP will condense everything into a single debt, which you’ll then have up to 10 years to pay.
In addition, using the DCP will mean previous credit facilities are suspended. This means you can pressure a serial gambler or online shopper into doing it, and it will consolidate their debt while blocking off their other credit lines and credit cards. Yes, you are the boss of them now.
The DCP does provide a limited borrowing facility, capped at one month of the applicant’s salary. This is to cover day-to-day emergencies, such as being too broke to buy groceries. Note that the term used is salary and not income, so those making money outside of a regular paycheck (such as by renting out a room) will need to check if their DCP lender is okay with it.
Persons using the DCP can start using other credit facilities again, once their outstanding debt falls below eight times their monthly income. Because some people need to stick their hand in the fire twice to learn that it’s hot.
The interest rate of the DCP will vary based on the situation, but it’s lower than almost all unsecured loan products. That includes credit cards, credit lines, and personal loans. You can approach 14 participating financial institutions about this product, and the credit officer in-charge will explain the interest rates with other conditions. These institutions are:
- American Express
- Bank of China
- Industrial and Commercial Bank of China
- Standard Chartered
(*The DCP cannot be used to consolidate renovation loans, education loans, medical loans, business loans, and credit facilities that are shared by more than one borrower).
Who can apply for the DCP?
The DCP is available to Singaporeans and Singaporean Permanent Residents, who have debts that exceed 12 months of their salary.
(Oh, did your eyes pop out of your head? Well that’s not as improbable as it sounds. For example, if you were a senior manager making $15,000 a month, but got retrenched and became an Uber driver making $2,500 a month, you could easily be in this situation).
DCP applicants must be earning between $30,000 to $120,000 per annum, and must not have net worth exceeding $2 million.
Applicants must not have a DCP with any other financial organisation. However, they can apply to refinance (switch) the DCP to another participating institution. They can do this after servicing the DCP for three months.
Why are we doing this now?
The Monetary Authority of Singapore (MAS) is reducing credit limits across the board, because we don’t want to wake up one morning and realise everyone’s money is just imaginary.
At present, it’s possible to owe up to 24 times your monthly income. Starting in June this year, however, the limit will be lowered to 18 times monthly income. By 2019, the limit will be reduced to 12 times monthly income (hence the DCP catering to those who owe more than this target amount).
The DCP is meant to ease the process of repayment, for those who owe large amounts.
But I don’t owe that much!
You can do debt consolidation on your own.
First, calculate the total amount you owe across all your credit cards and credit lines. Next, take out the lowest interest loan you can find (this will generally be a fixed instalment loan of some sort), and pay off all your other debts. You’ll need to browse the different banks to find the cheapest loan option.
For example, say you owe $20,000 in credit card debt at 24 per cent interest.
You could take out a personal instalment loan for $20,000, at 6 per cent interest. Then you repay all your credit cards via the personal instalment loan, and close the credit card accounts. This leaves you servicing only one loan, instead of multiple credit loans. You’ll also pay less interest.
Ultimately, the DCP isn’t intended for people who owe small sums, like a few thousand dollars. Its target is the small minority who owe over a year of their income; and if that’s you then please look into it before your debt gets worse. For everyone else, you can stick to low interest instalment loans to consolidate your debt.
Featured image by Sean Chong.
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