If you’re ever in considerable debt, you might come across two options: applying for a debt consolidation loan or going for debt settlement. Both are forms of debt relief, but they function very differently.
In this article, we examine the differences between a debt consolidation loan in Singapore and debt settlement, as well as which makes the most sense for your financial situation.
What Is A Debt Consolidation Loan?
A debt consolidation loan is exactly what its name suggests; when you are in a debt consolidation plan (DCP), all your unsecured loans are combined into a single one. This means that you no longer have to keep track of different interest rates, loan types and deadlines.
There are many benefits to getting a debt consolidation loan in Singapore. The first is the simplification of the debts you owe, as mentioned above. The most prominent advantage, however, is that consolidation often garners a lower interest rate than what you were previously paying for the separate loans. For example, assuming you have three credit card loans of an average interest rate of 26% p.a. each, HSBC’s consolidation plan offers an effective interest rate of 8.5% p.a. – 10% p.a.. A lower interest rate may help you finish paying your debt faster as the money saved with paying less interest can be used to increase the monthly amount paid to your DCP.
R2D Credit’s debt consolidation plan also offers an attractive interest rate tailored for your financial situation. If you’re not familiar with licensed money lenders in Singapore, expand your options by learning more about licensed money lenders in Yishun now.
The next benefit of getting a debt consolidation loan in Singapore is that the loan tenure tends to be longer and more flexible. Banks like POSB offer loan tenures of up to 8 years, with HSBC offering up to 10 years. This is important as the longer the tenure, the lower the amount you have to pay monthly, and thus the lesser chance of defaulting and accruing late payment fees. Of course, the other side is that the longer the tenure, the more interest you are paying over time.
There are two cons to getting a debt consolidation loan in Singapore. Firstly, all your existing unsecured credit facilities will be closed or suspended, which means you can no longer use them. Any additional amount used will not be consolidated, and using such credits may thwart the entire plan.
The next con is the list of eligibility requirements. Most banks, like POSB and HSBC, require you to earn between SGD30,000 and below SGD120,000 per annum. In addition, you will have to be a Singaporean citizen or Permanent Resident, be of 21 to 65 years of age upon loan maturity date, and have a Balance to Income Ratio (BTI) of more than 12 times your monthly income.
Thankfully, licensed money lenders in Yishun such as R2D Credit have a more flexible DCP with less rigid requirements. In addition, in view of you not being able to use your existing unsecured credit cards, R2D Credit is able to grant a personalised loan for any of your cash needs like paying for everyday groceries or other expenses.
What Is Debt Settlement?
While debt consolidation combines multiple debts into a single loan with you ultimately paying everything off, debt settlement in Singapore does not combine anything. It has two main types.
The first involves appealing for a more affordable payment plan for your debts. For instance, you may write to your bank to request paying smaller instalments over a longer loan tenure.
The second involves asking your creditor/s to lower the amount you have to pay, effectively giving you a discount to what you owe. For this second type, the catch is that you normally have to pay one lump sum by an agreed date.
Since the first type of debt settlement is more straightforward, let’s focus on the second type. The main advantage of settling your debt in this way is that you can remove the entire debt without paying the balance in full.
While paying for less than what you owe sounds attractive, there are two main cons. Firstly you must have a lump sum of cash ready at hand. The amount has to be attractive enough to the creditor for the settlement to be considered. Hence, only go for this way of debt settlement if you are able to raise the lump sum either by liquidating assets or other ways. If you are not able to raise the desired amount, perhaps seeking a DCP might be a better option.
The other disadvantage is that debt settlement would likely harm your credit score. This is because the creditor has settled for less than the full amount, and this loss would translate to a lowering of your credit score.
Which should you choose?
If you are able to raise a large amount of money and you are not put off by bad credit scores, consider settling your debt by asking for a discount. Otherwise, consider settling your debt by asking for a more affordable payment plan.
Otherwise, getting debt consolidation loans in Singapore is a good way to recognise and slowly pay off all your debts. However, make sure you stick to the plan and fulfil the monthly payments to not accrue more interest than needed. For more flexible arrangements, licensed money lenders may be just what you’re looking for.