Although not many may think much of it, managing one’s personal finances can be an incessantly stressful chore. While for some lucky few, their monthly debt may be limited to a single phone bill, others may have to cover mortgage fees, utility bills, credit card debts, student loans and so on. Individuals who may have taken more debt than they can handle may be best suited to take up a debt consolidation plan to help clean up the mess of haphazard payments into one scheduled flow.
As the name suggests, debt consolidation plans, or DCPs, are contracts between yourself and a new financial institution of choice, a DCP institution, to restructure your debt repayment. Taking up a DCP redirects your debt repayment flow from “1 debtor to many lenders” to a “1 to 1” payment flow. DCPs most commonly take the form of unsecured loans; which are personal loans not backed with assets, and are thereby more welcoming to applicants.
In brief, DCPs can support one’s management of personal funds by (a) Streamlining Finances and (b) Saving Costs (c) Stretching Out your Repayment Timeline and (d) Improving your Credit Score. Streamlining Finances can provide one with a peace of mind by eliminating time needed to regularly keep payments in check with multiple lenders at different points in time. Cost savings often happens when one enters into a DCP with an interest rate lower than that of their personal loans. In most cases, this is best represented by someone with credit card loans switching over to a DCP. These plans also support in Stretching Out your Repayment Timeline by providing flexibility in deciding your repayment tenure, though on average at 5-8 years long! A longer tenure equates to lower and more manageable repayment per month, though is to be balanced with the cons of higher overall interest. Lastly, having your existing debt be paid off as part of your DCP would result in you having more credit available than used; thereby Improving your Credit Score.
Let us unpack why this arrangement works. DCPs are offered mainly to support those struggling to retire their debt - whether it be due to the overwhelming amount of money borrowed, or a lack of management. DCPs therefore restrict applications to individuals who have a substantial debt burden (see eligibility below).
Here is what an example of what an effective DCP looks like:
As you can see, the DCP program makes the total loan more affordable as it lowers the monthly repayment and the overall interest paid.
Knowing what DCPs and their benefits are, who then should DCPs be more suited for?
As mentioned earlier, the altruistic nature of DCPs aimed at supporting those struggling with debt management. In particular, these plans welcome those with an annual income of less than $30,000 or accumulated debt over 12 times their monthly income. Compared to regular personal loans, DCPs are therefore less rigid in their application process and welcome many to leverage on its benefits.
However, despite an interest in taking up a DCP, debtors will also have to fulfil certain requirements in order to have their application approved. Apart from meeting minimum debt requirements, DCP applicants must also be Singaporean Citizens or Permanent Residents and have the necessary creditworthiness to qualify. Credit ratings can serve you well when getting your loan application approved and is undeniably a worthy investment for the long run.
DCPs have a coverage limited to certain types of loans, in particular, excluding renovation, education, hospital, business and joint loans. When assessing the terms of existing loans, effective DCPs should cover loans with high interest rates, short and unmanageable tenures as well as late payment fees.
Having assessed that DCP is right for you, it is now time to work on the the preparation. On top of the paperwork required as proof of your credit history, common pieces of documentation include a letter of employment, two months' worth of statements for each credit card or loan you wish to pay off, and letters from creditors or repayment agencies are needed.
At the moment, 14 different lenders with varying competitiveness include Oversea-Chinese Banking Corporation (OCBC), MayBank, Standard Chartered and others. Since these lenders offer slightly different plans in terms of interest rates, tenure, administrative feels and management style between lender and debtor, it is advised that you compare their plan’s differences and apply only for 1. Similar to selecting a lender for a personal loan, you may consider looking at the different pros and cons of lenders and how exactly you can make a good judgment of a financial institution to partner with.
Not sure where to begin or what these all mean?
Q: How Can I Ensure My DCP Stays on Track?
In helping to ease you into your DCP, your first plan begins with an additional 5% allowance above the total amount of debt covered. While adjusting to the new change in payment schedules, this window of coverage will help you deal with incidental charges you might incur from the time the DCP got approved until the time the DCP funds are received.
If the DCP amount agreed upon does not fully cover all existing debt, the borrower is to be responsible for the payment of the gap and to do so without engaging in other unsecured credit lines.
Q: Moving Forward, How Should I Take Up Future Loans?
After your first DCP, you will not be allowed to take up another credit card until your debt has fallen to less than 8 times of your monthly income. This practice is to ensure that DCPs continue helping necessary individuals to retire their loans, and not to support excessive spending.
For those who stumble across a financial institution offering better rates after entering into a DCP can only refinance with their new DCP institution 3 months upon entering into the contract.
Q: What Specific Documents Do I Need to Provide for my DCP Application?
Q: Which Loans Should I Prioritise Under my DCP?
A DCP covers all existing debt except for those not allowed (renovation, education, hospital, business and joint loans) and may not be altered to cover specific ones. Upon application, the credit bureau and financial institution will assess all your existing loans and if approved, will pay off your loans with your lenders in a settlement. The DCP becomes a personal exchange between you and one DCP institution.
Q: TLDR: Who is Eligible for DCPs?
Q: Are DCPs the Same as Credit Counselling?
No, DCPs help with the restructuring of your personal loans, while credit counselling helps with writing off debt where it can not be fully covered. Credit counselling is led by Credit Counselling Singapore, an independent, non-profit, social service agency while DCPs are supported by financial institutions such as banks, or alternative lenders where possible.
With these pieces of information in mind, we recommend follow-up practices to support the lifestyle with a DCP and thereafter. With a new spending and repayment habit in mind, here are some tips to keep you on track for the future.
Keep Payment on Time - it is important to not challenge the approved DCP amount by paying late as any additional costs will have to be borne by the debtor. It is also important that as DCPs work towards improving one’s credit score, timeliness of repayment will help to determine the improvement in said standing. Change Your Spending Habits - Apart from adopting timeliness as a new part of spending habit, it is encouraged that DCPs push current debtors towards financial independence and responsible spending. Practising controlled spending and responsible repayment habits can most importantly help reduce the amount of future debt and the need to take up another DCP in one’s lifetime. Observe Changes in the Market Offerings - As mentioned, individuals are able to switch from one DCP institution to another after 3 months of entering into the contract. Apart from DCPs specifically, individuals who have outstanding loans should keep an eye out for alternative financial institutions to refinance with in order to save large costs on heavy loans.
As with many financial products, DCPs too have their fair share of benefits and caveats. While targeting to help those susceptible to cyclical debt, it is also important for these individuals to seek a way out. Taking up a debt consolidation plan is a great stepping stone for those not too sure where to begin but should be complemented with regular check-ins on payment feasibility in the long haul.
If you are still unsure about debt consolidation, do feel free to reach out to us for a free consultation and we can point you to the right DCP providers. Take the step to financial prudence today.
Tarsilla has been an avid writer since 2019 and covers topics from event exclusives, photography, to finance. With a creative and explorative mind, she actively seeks opportunities to learn new things and takes challenges head-on.