You will be able to explain what a Debt Consolidation Plan does and what it asks of you.
Kumar's kitchen table on the first of the month looks like this: two card statements from two banks, a credit line statement from a third, three due dates, three minimums and three interest rates. Each lender sees only its own piece. Nobody but Kumar sees the whole, and he has stopped wanting to look.
One of the options built for people in his position is to swap the three debts for one. In Singapore, the standard version of that is called a Debt Consolidation Plan.
A Debt Consolidation Plan, often shortened to DCP, is a loan offered by participating banks that pays off your unsecured debts with different lenders, such as credit card balances and credit lines, and replaces them with a single loan at one bank. Instead of several balances, several rates and several due dates, you have one balance, one interest rate and one fixed monthly instalment, over a set term.
The idea is simple. Your card and credit line debts are revolving: no end date, high rates, and minimums that keep the balance alive for years, as lesson 2.2, Why the minimum payment keeps you in debt for years, showed. A consolidation plan turns them into an instalment loan with an end date. If you pay every instalment, the debt is gone at the end of the term.
The plan was set up by the banking industry for people whose unsecured debt has grown large compared with their income. The Association of Banks in Singapore explains the scheme and lists the participating banks on its website, abs.org.sg.
Eligibility depends mainly on two things: your income, and how much interest-bearing unsecured debt you have compared with it. There are also conditions such as citizenship or residency status. The thresholds are set by the scheme and can change, so check the current criteria with the participating banks or on the Association of Banks in Singapore website before you apply. Don't rely on a figure from a friend or an old article.
Secured loans, such as a car loan or a home loan, are not part of it. Neither are loans from licensed moneylenders. A DCP is for debts like cards and credit lines with banks and other financial institutions.
A consolidation plan is a fresh start on the repayment, and the conditions are there to stop the old pattern from returning.
When you take a DCP, you are expected to stop adding new unsecured debt. In practice that usually means your other credit cards and credit lines are closed or suspended, and you may be left with limited access to credit for the life of the plan. The details are in the plan's terms, so read exactly which facilities are affected before you sign.
The condition is deliberate. Lesson 3.3, Balance transfers: a cheap bridge with a fee and a deadline, showed how a balance transfer fails when new card spending builds up behind it. A DCP removes that possibility by design. If you take one while planning to keep using cards as before, it will not work, and you will end up with the consolidation loan and new card debt as well.
Before signing, set the plan's terms against your current debts. Compare the EIR of the DCP with the rates you are paying now, the term with how long your current plan would take, and the total you would repay.
Here is Kumar's case with example figures. He owes S$30,000 in total: S$14,000 and S$9,000 on two cards at 26%, and S$7,000 on a credit line at 20%. The interest alone is about S$615 a month. His minimums come to about S$915, and only about S$300 of that reduces his debt.
Suppose a DCP offered to consolidate the S$30,000 over five years at an example EIR of 8%. The instalment would be about S$608 a month, less than the S$615 of interest he currently pays each month, and it would clear the whole debt in 60 months. Total interest over the five years would be about S$6,498. Over seven years at the same example rate, the instalment would fall to about S$468, but total interest would rise to about S$9,277.
Those figures are made up. A real offer depends on your income, your debts and the bank, and the rate and term are set when you apply. The method stays the same: compare the single monthly payment with what you pay now, and the total interest with what you are on course to pay.
A DCP is not always the cheapest option, and you may not qualify. But for someone with several revolving debts at high rates and enough income to meet one fixed instalment, it is often worth looking at seriously.
Kumar's next step is to find out whether he is eligible and what his payment might be. Yours is the same. Look up the current Debt Consolidation Plan criteria on the Association of Banks in Singapore website or a participating bank's site, put them beside your own income and debt list, and estimate your single monthly payment using the PMT function from lesson 2.4.
Look up the current Debt Consolidation Plan criteria and write whether you would qualify and what your single monthly payment might be.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).