How Does A Debt Consolidation Loan Work?

Getting into debt with multiple loans from different credit companies is not an uncommon occurrence. What is uncommon is having the plan to get out of it.

A debt consolidation loan is one such way you can get out of debt. But how does debt consolidation loan work?

Whether you have large overdue payments for a single credit card or you have several different debts with different interest rates, you can use a debt consolidation loan to get out of debt.

This type of loan will allow you to pay off your current debts and be left with just one monthly payment to make.

We will look at debt consolidation loans in detail in this article, including how does debt consolidation loan work.

What Is A Debt Consolidation Loan?

A debt consolidation loan is basically a new loan that pays off your existing debts. The new loan has a lower interest rate than your existing debt and a longer repayment period, which can make your monthly payments more affordable.

With a debt consolidation loan, you can easily combine all your current debts – be they credit card debts or personal loans – into a single loan with one monthly repayment. This makes it much easier to keep track of your debts and finally get out of debt for good.

In Singapore, debt consolidation loans can only be used if your debt is more than 12 times your monthly income.

How Does Debt Consolidation Loan Work?

If you have various debts with different interest rates, a debt consolidation loan can be the best way to get out of debt.

This is because a debt consolidation loan offers a lower interest rate and a longer repayment period, which can make your monthly payments more manageable.

Under a debt consolidation loan, you will only have to make one monthly payment instead of multiple payments to different creditors.

Let’s say you have a total outstanding debt of $50,000 to pay for one personal loan and two credit cards with a monthly salary of $4,000.

The personal loan interest is around 11% per annum, the credit card loans have an interest of around 25% per annum. If you are not able to keep up with the minimum payment criteria, the outstanding debt may become unmanageable.

In this case, a debt consolidation loan with a reasonable interest rate may be able to help by giving you some breathing space.

Even if the loans and debts are from different financial institutions, it is still possible to consolidate all these debts into a single loan. This can be done by taking out a debt consolidation loan from a licensed money lender in Singapore.

Banks offer debt consolidation plans (DCPs), which have slightly different criteria from debt consolidation loans, which you can get from a licensed money lender.

How To Use A Debt Consolidation Calculator

It is important to note that the loan terms for debt consolidation loans may vary depending on the lender. As such, it is important to compare different debt consolidation loans before making a decision.

One way to compare different debt consolidation loans is to use a debt consolidation calculator. This will allow you to input your current outstanding debts and monthly salary, after which you can see which loan offers the lowest monthly repayment.

A debt consolidation calculator can give you a list of estimates for loan offers, as well as the interest rates, tenures, and payment plans related to the offer.

How Much Can You Borrow?

You can consolidate loans from banks in Singapore equal to the total amount of outstanding debts you have. This also includes the other fees and accrual charges for your accounts.

In case the debt consolidation loan amount approved is less than what you owe, you will have to make up for the difference with your own savings or by taking out another loan.

For the first debt consolidation loan you take up in Singapore, you can get an allowance of 5% that can be used to pay for any extra fees or costs associated with the consolidation process.

Qualifying Criteria Of A DCP

Just like any other loan in Singapore, you need to fulfil certain criteria in order to qualify for a debt consolidation plan.

To be eligible for a debt consolidation plan in Singapore, you must:

• Be a Singaporean or permanent resident (PR)
• Have an annual income that is between $30,000 to $120,000.
• Have personal assets with a net worth of no more than $2 million
• Be heavily indebted with an outstanding debt amount of more than 12 times your monthly salary

If you satisfy the above criteria, you may be eligible for a debt consolidation plan in Singapore.

Where To Apply For A Debt Consolidation Loan Or DCP?

You can apply for a debt consolidation loan from licensed money lenders in Singapore. Debt consolidation plans are only available from these participating financial institutions:

• American Express International, Inc.
• Bank of China Limited Singapore
• CIMB Bank Berhad
• Citibank Singapore Limited
• DBS/POSB Bank Ltd
• Diners Club Singapore Pte Ltd
• HL Bank
• HSBC Bank (Singapore) Limited
• Industrial and Commercial Bank of China Limited
• Standard Chartered Bank (Singapore) Limited
• Maybank Singapore Limited
• Oversea-Chinese Banking Corporation Limited
• RHB Bank Berhad
• United Overseas Bank Limited

Apart from these, there are also many licensed money lenders in Singapore that offer debt consolidation loans.

No matter if you have existing loans from these institutions or not, you can apply for their consolidation plans as long as you meet their qualifying criteria.

When applying for a debt consolidation loan with a licensed money lender, you need a few documents.

These include your identification card, income statements for the past three months, CPF contribution history statement for the past 12 months, credit bureau reports, confirmation report for due amounts, and latest bank statements.

Once you have gathered all the necessary documents, you can proceed to submit your application online or in person.

Alternatives

If you are not eligible for a debt consolidation loan or a debt consolidation plan, or if you do not want to opt for one, there are other alternatives that you can consider.

Work Out A Plan With Your Creditors

Instead of consolidating all your debts into a single loan, you can try to work out a payment plan with your existing creditors. This can be done by negotiating with them and agreeing on a lower monthly repayment amount that is more affordable for you.

However, this may not be the best option if you have multiple debts from different creditors as it can be difficult to keep track of different repayment plans.

Refinance Your Home Loan

If you have a home loan, you can consider refinancing it for a lower interest rate and use the savings to pay off your other debts. However, this should only be done if you are certain that you can afford the monthly repayments on your home loan.

Take A Personal Loan

Another alternative is to take out a personal loan and use it to pay off your debts. This can be a good option if you have a low debt-to-income ratio and can afford the monthly repayments on the loan.

However, you should compare different personal loans before choosing one as there can be significant differences in the interest rates and fees charged by different lenders.

Consolidate Your Debt With The Right Lender

To sum it up, a debt consolidation loan or debt consolidation plan in Singapore can be a good option if you are heavily indebted and struggling to make your monthly loan repayments.

It can help to lower your monthly repayments and make it easier for you to pay off your debts. However, you should compare different loans and lenders before choosing one to make sure that you get the best deal possible.

Not sure where to consolidate your debts? Visit Katong Credit to get competitive debt consolidation loan offers now.

We are one of the most trusted licensed money lenders in Singapore, offering some of the most affordable interest rates and fees.

Apply for a loan now in just five minutes or contact us for more information. We will be more than happy to hear from you.