Are you finding yourself overwhelmed by numerous different debts? Perhaps you have credit card bills and personal loans, or several small-loan products that are outstanding. Making multiple payments can be overwhelming and potentially costly due to high interest rates. In Singapore, you may also have received some advertising on a Debt Consolidation Plan to help you manage your debt. But how does a Debt Consolidation Plan stack up against a loan, and which should you choose? This blog will flesh out the differences between a Debt Consolidation Plan and other loans, helping you determine the pathway to your debt-free life. We’ll also discuss how a licensed debt consolidation plan money lender, such as Golden Credit, may be able to assist and provide the best debt consolidation plan that Singapore locals would appreciate.
What is a Debt Consolidation Plan?
DCP or Debt Consolidation Plan is a scheme that was created to assist an individual in refinancing their unsecured loans into one bundled monthly payment. It is issued by financial institutions (banks) in accordance with the regulations of the MAS. Briefly, you take out one new loan that’s used to pay off all your existing unsecured debts (such as credit card balances, personal loans, etc.) under that plan. After that, you’ll only have one loan, one interest rate, and one monthly payment to deal with, instead of many.
How does Debt Consolidation Plan work in Singapore?
When you’re approved for a DCP, the bank or financial institution will sign off on a loan large enough to cover all of your other debts in full. This is usually a 5% buffer to take into account any ‘slush’ you might want to repay, or some provision for any fees or interest that accrue during the transfer. Once you’ve been approved, your multiple debts (credit cards, etc.) are generally cut off or frozen, and you then pay the new consolidated loan. This can be beneficial to streamline your payments, making just one payment a month rather than multiple, and lowering the monthly payment in many cases.
Benefits of a Debt Consolidation Plan
- Lower Interest: A DCP generally provides a lower interest rate than what you were paying on your credit cards or other high-interest loans. Credit card debt, for example, carries interest of around 25% per annum, while most debt consolidation loans in Singapore have interest rates much cheaper than that. Paying less interest enables you to eliminate your total debt more quickly and put some money back in your pocket.
- One Payment a Month: Say goodbye to multiple payment deadlines and hello to one payment due date a month. It’s easier to manage this one payment to one lender, and there’s less risk of accidentally missing a payment.
- Structured Debt: A DCP usually has a fixed repayment plan. You have a defined deadline (say 3-10 years, or how long it takes you to pay off your loan) to become debt-free. This disciplined framework can be motivating, and it prevents debt from accumulating indefinitely.
- More affordable Monthly Repayments: When you consolidate and stretch out the loan term, your newly combined loan could have lower monthly repayments compared to when you added the individual loans together. This increases immediate cash flow, but remember — the longer the tenure, the more interest you will pay over time.
Note that a Debt Consolidation Plan is applicable for unsecured personal debts. It typically won’t include housing loans, car loans, or business loans. In Singapore, one would in fact need to: In fact, to qualify for a DCP in Singapore, you typically need to:
- Be a Singapore Citizen or Singapore Permanent Resident.
- Have an income of between S$20,000 and S$120,000 annually (with net personal assets not exceeding S$2 million).
- Have total unsecured debt equal to or greater than 12 times your monthly income.
These measures imply that DCPs are aimed at consumers who have built up substantial personal debts as a proportion of their income. You can have only one active DCP at a time, and it must include all of your unsecured debt with the financial institutions. If you are eligible, a DCP could be a lifesaver to help you restructure your finances. But what if you don’t qualify, or what if you’re thinking about taking another path? This is when comparing a DCP vs other loans is necessary.
Personal Loans and Other Loan Types
Before we discuss choices, it’s essential to define what we mean by “loans” in this instance. A personal loan is a popular form of unsecured loan and can be used for nearly anything — from an unexpected expense to a large purchase or even debt consolidation. But other types of loans are specialized:
- Personal Loan: A small-amount loan that you repay in installments over a fixed term, such as 1 to 5 years with a bank or longer with an alternative lender. It is typically offered with a fixed interest rate. Personal loans are often taken out for credit card refinancing, home improvement, medical expenses, or other significant expenses.
- Payday Loan: A very short-term loan (to be paid off by your next payday). Such Singapore loans are usually smaller in size and are made by licensed moneylenders. Though they get borrowers’ money fast, they charge high interest rates and fees because of the short repayment window.
- Business Loan: A loan for business-specific use – such as to start a business, grow an existing business, or manage cash flow for a business. Loans for business frequently involve whether the business can prove income or provide collateral, and are also not for personal use.
All of these loans meet different financial needs. You’re likely comparing options like a Debt Consolidation Plan versus a personal loan, or considering quick fixes like payday loans, especially if you’re struggling with increasing personal debts. You generally don’t want to use personal loans for business loans (not to mention, banks probably won’t let you), so we’ll compare your personal and payday loans options.
Here, let’s have a comparison between a Debt Consolidation Plan (DCP) and these other loan options to draw a conclusion on which you should take up in different circumstances.
Debt Consolidation Plan vs Personal Loan
On the face of it, a personal loan vs a Debt Consolidation Plan may seem similar – you get an amount of money, and you pay it back. The truth is, a DCP is a type of personal loan designed for debt consolidation. Here are some of the key differences and considerations between a DCP and a typical personal loan:
- Purpose: A Debt Consolidation Plan is designed to merge and cancel out several debts. The money in a DCP is used to pay your credit card/loan balances directly. A personal loan, on the other hand, can be used for whatever you wish. You could use a personal loan to consolidate debt, but you don’t have to; you could also use the money for other expenses. With a DCP intention and usage kept narrow, which adds discipline.
- Interest Rates: Debt Consolidation Plans generally offer competitive interest rates for overindebted persons. In Singapore, interest charged on DCP by banks may fall in the range of about 3-6% p.a (the effective interest rate could be higher after accounting for the fees), which is lower than credit card interest rates (typically around 25% p.a.). Actually, standard personal loan interest rates can be pretty low as well. If you’re a good borrower, a personal loan from a bank could go as low as 4-8% p.a. But if you’ve already racked up lots of debt, you may not get the lowest rates on a new personal loan. Licensed moneylenders have slightly higher interest caps (capped at up to 4% per month by law for personal loans), so if you use a moneylender’s personal loan to consolidate, the rate might be higher than that of a bank’s DCP. In a nutshell, the best debt consolidation plan Singapore banks have to offer could mean saving a lot more on interest than a typical loan, that is, if you qualify for it.
- Eligibility & Approval: The rules for qualifying for a DCP are more stringent. You must meet the income and debt criteria we discussed earlier, and this opportunity is exclusive to Singapore citizens/PRs with significant debt. Banks also have minimum income (generally around $20,000 a year for residents), and you will need a reasonable credit score, plus proof of income and good credit history. However, the bank doesn’t specify what it thinks is “high debt”. In fact, if you have too much debt compared with your income, a bank can deny a new personal loan application because it believes you can’t repay. Licensed moneylenders, however, may offer personal loans or debt consolidation loans to individuals with high debt in Singapore, albeit at a higher interest rate. In essence, if banks reject you, a money lender’s loan debt consolidation plan could have less restrictive approval.
- Loan Amount & Tenure: With a DCP, there’s a significant cushion, as the borrowed amount is roughly equivalent to the amount needed to clear your existing unsecured debts. This means the difference won’t be substantial enough to be of much use to you. The term could be extended to make payments more manageable — some consolidation plans let you drag it out to 7 or even 10 years, depending on the sum of your debt. At banks, maximum tenures for personal loans are generally 5 years (though, with a charge, moneylenders may offer longer instalment plans). If the exception is that you need a huge amount of money to pay off all your debts, a DCP with a bank might work as long as the term is longer. If you take a personal loan, you can only borrow up to the bank’s maximum loan amount (usually up to 4x your monthly income for unsecured loans, unless it’s a secured loan).
- Impact on Credit and Spending: When you take out a DCP, banks will usually want you to close off or at least suspend your previous credit lines (such as your credit cards and et cetera) until you have already substantially paid down your consolidated loan. It’s kind of like being forced onto a tight repayment plan. That’s good, because it prevents you from taking on new debt while you’re paying off the old. There’s no such requirement with a personal loan – you could, in theory, still use your credit cards or take out more loans (though you’d be smart not to). For others, the disciplined nature of a DCP demands better financial habits of themselves or their family members. But if you want flexibility, or if you have only one debt to pay off, a straightforward personal loan can be a good fit.
Which to choose – DCP or personal loan?
If you have other high-interest debts and are snowballing them, and you fall within the DCP conditions, opt for the DCP instead – it makes sense 90% of the time. It tackles the issue head-on by reducing your interest expenses and streamlining your payments. But if your total debt is not that high or you’re ineligible for a DCP, you may be able to use a personal loan to refinance one or two costly debts. Only have the discipline to actually use the loan to pay off your old debts (some banks can help you with this if you state that as a purpose). Also, if you need to borrow for a new expense (say, an emergency bill) and you’re not buried in other loans, a plain-old personal loan is probably the best route to go (this is precisely why it’s called a personal loan).
Tip: Avoid taking out another loan in place of consolidation if you already have a lot of debts, as this may lead to a financial spiral. You don’t want to increase your debt load. You should only take out a new loan to replace and pay off more expensive debt. That’s part of why a DCP, or a targeted debt consolidation loan, is typically best for serious debt situations – they’re made for the replacement of debt, not addition.
Debt Consolidation Plan vs Payday Loan
Payday loans are not at all like DCPs. A payday loan is a short-term loan designed to tide you over until you get paid next. Licensed money lenders in Singapore who provide payday loans give you a sum of money based on your monthly income (or a fraction of it), with due repayment in a few weeks or the next month. They charge high-interest rates (ranging from 4% to 36% per month, compared to typical loan annual rates) and, in many cases, administrative fees. Let’s compare:
- Loan Purpose & Amount: A Payday loan is ideal for those who need small emergency loans. It is not intended as a Band-Aid for a long-term debt problem; in fact, it usually involves a small amount (a few hundred to a few thousand dollars). A Debt Consolidation Plan, on the other hand, is for long-term debt consolidation (of possibly high amounts — tens of thousands you owe via multiple credit cards and loans). If you have a severe debt problem, a payday loan is unlikely to solve it – it will just postpone the agony by a month and make it worse with charges.
- Interest and Fees: Very high for a payday loan. If you can’t pay on time, those late fees add onto the monthly interest, and suddenly, 4% per month is around 48% annually. That is well above the interest that you would pay on a debt consolidation plan, or even on a regular personal loan. In simpler terms, it’s like using gasoline to extinguish a fire; you risk getting burned financially. A DCP, by contrast, is supposed to reduce the interest on your debt, not raise it.
- Repayment Schedule: DCPs are repaid on a multi-year term basis. Payday loans are paid back in a lump sum or over several instalments in a short time frame. The clients of payday lenders cannot really afford to repay in one hit and end up rolling over or extending, a debt spiral. A DCP stops that cycle by providing a realistic timeframe to steadily pay everything off.
Eligibility: Payday loans are easy to get (almost no requirements other than proof of income and residence) — borrowers with bad credit can get them, and lenders have their risk reduced by the high rates of interest, so the amount lent is low. *:) And a DCP, as mentioned, has more stringent criteria. But that doesn’t mean just because people can get something (a payday loan) that it’s good for them.
Which to choose – DCP or a payday loan?
If you are dealing with a one-time, quick cash shortage and you are confident that you will be able to repay, a payday loan could be a secure remedy. However, if you’re already in debt, payday loans can only make things worse. It will become yet another high-cost liability. You’ll be better off consolidating your debt into a plan with a lower interest rate. For example, you could discuss a debt consolidation plan with a moneylender like Golden Credit, considering a short-term consolidation loan as an alternative to a standard payday loan. This way, you can refinance all your high-interest debts into a more manageable format. Summing Up Debt Consolidation Plan vs Payday Loan: What we’ve laid out holds and they are nothing alike: Until your loan or DCP is over, the sound of the two is miles apart. So: Use a DCP (or a consolidation loan) to resolve debt issues – and skip payday loans if you want to escape the debt trap!
Debt Consolidation Plan vs Business Loan
Business loans are for entrepreneurs and companies to keep the business going, not to pay off personal debts. Still, let’s clarify the distinction:
- Usage: Business loans are to be used for business purposes—such as purchasing equipment, hiring a staff member, or working capital for your company. They often ask for a business profile, financial statements, or collateral. And if you were to use a business loan to make personal payments on a credit card, it would be a misuse of the funds (and you may violate the terms of the loan). Debt Consolidation Plans are only for personal unsecured debts, on the other hand. A DCP is applicable if your debts come from personal spending or personal emergencies, and not if you have a business loan.
- Availability: For those small business owners who qualify, business loans are offered. And if you don’t own a registered business, you can’t even apply. DCPs are open to privately paying customers who owe a significant amount of unsecured debt. So in most scenarios, this comparison only applies if an individual who has business assets is considering using them to pay off personal debt (such as using a business term loan based on their company’s assets to pay off credit cards). This isn’t usually going to solve your problems because you’re putting your business at risk and not getting to the root of the personal finance issues.
- Cost: Business loan interest rates vary, but secured loans often have lower interest rates. But you’d be using collateral, like property or equipment, to back the loan. Debt consolidation plans and loans are not secured (you don’t have to provide collateral for the loan) and are based on your creditworthiness. If you have a combination of personal and business debts, you may require different tactics for each — say, a DCP for personal debts and some restructuring for business obligations.
Which to choose – Debt Consolidation Plan or business loan?
For personal debt issues, you should choose the personal route: either a DCP or an eligible debt consolidation loan in Singapore. Forget the business loan for business needs only. If your company is deep in debt, there are other refinancing alternatives and professional guidance available on that, but that is not what personal debt consolidation is all about. The bottom line is, don’t commingle business debt and personal debt; keep them completely separate and address them with the appropriate solutions. When it comes to personal debt, focus on securing the best personal loans Singapore has to offer, and reserve business financing for business-related adversities.
Which Option is Right for You?
So now that we’ve discussed the differences between a Debt Consolidation Loan and other types of loans, how do you decide which one you should take? Below is a general guide to choosing the option that you’ll benefit from the most:
- If you have multiple unsecured debts (credit cards and personal loans) with high interest rates, you may want to consider a Debt Consolidation Plan. It is meant to be used just for this purpose. Consolidating your debt simplifies your life and often results in a lower interest rate, particularly if most of your debt is credit card debt. Over time, you’ll pay less interest, and the debt will be behind you faster than if you keep juggling many bills.
- Whether you’re eligible for DCP or not: See if you qualify for a bank’s DCP (eg, debt >12x monthly income, etc). If so, it would be foolish not to get a loan from the bank or a finance company; the interest rate is that good. If you don’t qualify (and perhaps your debts are significant, but less than 12x income, or you might be non-resident, or have some debts – like renovation or medical loans – that are not covered by DCP), don’t worry – you still have options. You can search for a debt consolidation loan in Singapore provided by licensed money lenders, who are likely to offer more flexibility. Interest will be higher than what a bank offers, but you may still save enough to keep your situation from getting worse.
- If you have just one or two smaller debts, such as a single credit card and a loan, and they’re not too out of control. In that case, taking another giant consolidation may be unnecessary. You might budget to pay those off snowballing, or take out a low-interest personal loan and refinance that one big debt. The general rule of thumb: consolidation is your best friend when you have lots of debts, or very high-interest ones. If not, a more straightforward loan or just a disciplined payoff might be better.
- Escaping the debt trap: If you’ve been eyeing payday loans or other quick fixes to cover your debt, stop and think again. Those may provide instant relief, but often at a costly price that only digs you deeper. The fact that you are weighing options suggests you want to fix it now, not push it down the road. The purpose of a consolidation plan or loan is to eliminate your debt, but not your responsibility, by reshaping it. Instead, a fresh short-term loan (such as a payday loan) only means adding one more creditor to serve. The only time to consider a payday loan is in an emergency where there are no other funds available and you are sure you won’t lose your job or give rise to a new world crisis before you’re able to repay it. It is a last resort, even then.
- Consider professional advice: You may find yourself in over your head — try seeking credit counselling or financial advice. In Singapore, there’s CCS (Credit Counselling Singapore), which provides a Debt Management Programme (if you don’t qualify for DCP). For some, discussing options with a licensed money lender offering consolidation can also be beneficial. For instance, there are loan advisers who can tailor a customized debt consolidation plan for you, and some offer free consultations, such as Golden Credit. Sometimes, a friendly touch and expertise can help uncover the correct solution for your needs.
Remember that a Debt Consolidation Plan vs a regular loan has different points of intention. One is a rescue package for debt issues, the other a borrowing tool. Going the DCP route serves as a sign that you’re serious about systematically paying off your debts. Whatever path you choose, ensure you have a repayment plan in place that you can follow.
Choosing the Best Debt Consolidation Plan in Singapore
If you determine that debt consolidation is the way to go, the next step is finding the right provider. Banks have established formal Debt Consolidation Plans for borrowers who qualify. But what if you want something a bit more tailor-made, or the banks’ criteria don’t reflect your situation? This is when working with a debt consolidation plan money lender like Golden Credit can be very useful.
Golden Credit is a Singapore-based licensed money lender that specialises in debt consolidation solutions. We recognise that everyone’s situation is different. We will take the time to listen to your situation and develop a personalized strategy to consolidate your debts into a single, manageable loan. Even if the banks have rejected you or you have a bad credit score, we can help you with a debt consolidation loan. Being a legal lender (accredited by the Ministry of Law), Golden Credit observes supreme practices to bring you convenient interest and clear costs.
When looking for the best debt consolidation plan Singapore has to offer, keep an eye on interest rates, repayment flexibility, and the credibility of the provider. Golden Credit sets its interest rates and repayment plans at a competitive level, offering a flexible plan that fits within your affordability range. This way, you won’t have to tighten your belt just to pay off your consolidated loan. We also focus on communicating clearly, so you know the loan terms and are comfortable with your decision.
Being in a lot of debt is a distressing experience, but you don’t need to deal with it on your own. Consolidate your debts today and take charge of your money. Whatever bank program or licensed-money lender loan you consider, ensure it’s the right one for you. If you’re not sure which direction to head in, contact Golden Credit for a free consultation. Talk to us about how our debt consolidation loans in Singapore can help make your repayments easier and get you on the road to a debt-free future. Our friendly loan consultants are here to help you compare a Debt Consolidation Plan with other loan options and walk you through all the processes. Don’t continue to let debt drag you down; consolidate today and confidently face the future!
