Difference Between Debt Consolidation Loan and Debt Settlement

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Difference Between Debt Consolidation Loan and Debt Settlement

Close-up top view of man’s hands holding bills while considering debt consolidation or debt settlement, as a woman makes notes
Close-up top view of man’s hands holding bills while considering debt consolidation or debt settlement, as a woman makes notes

If you live in an expensive city like Singapore and have accumulated considerable debt, chances are, you’ve thought about getting yourself out of this situation. There are two ways you can lessen the burden of having debt in Singapore: applying for a debt consolidation loan or opting for debt settlement. Loan providers are aplenty in Singapore, from local money lenders to banks and financial institutions.

Debt consolidation loan explained

What is a debt consolidation loan?

A debt consolidation loan offers the option of a debt consolidation plan (DCP), whereby all your unsecured loans are combined into one. This means that you no longer have to keep track of different interest rates, loan types, and deadlines.

What are its benefits?

Anyone who has taken a loan from licensed money lenders will know that there are many benefits to getting a debt consolidation loan. The first is the simplification of the debts you owe. The most prominent advantage, however, is that consolidation often allows you to get a lower interest rate than you were previously paying for the separate loans. For example, assuming you have three credit card loans with an average interest rate of 26-27% p.a. each, a bank’s consolidation plan might offer an interest rate as low as 3.48-6% p.a. depending on your loan amount and tenure. This substantial reduction in the interest rate may help you pay up your debt faster.

Debt consolidation plans also typically offer attractive interest rates tailored to your financial situation. If you’re not familiar with licensed money lenders in Singapore, expand your options by learning more about borrowing legally from licensed money lenders.

The next benefit of getting a debt consolidation loan is that the loan tenure tends to be longer and more flexible. POSB’s debt consolidation plan offers loan tenures of up to 8 years, while HSBC’s debt consolidation plan offers tenures of 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 your chance of defaulting and accruing late payment fees. Of course, this needs to be balanced against the fact that the longer the tenure, the more interest you will be paying over time.

What are its disadvantages?

There are two disadvantages to getting a debt consolidation loan in Singapore. First, all your existing unsecured credit facilities will either be closed or suspended, which means you can no longer use them.

The next con is the list of eligibility requirements. Banks like POSB and HSBC require you to earn between SGD30,000 and SGD120,000 per annum to be eligible. In addition, you will have to be a Singaporean citizen or Permanent Resident, be of 21 to 65 years of age upon the loan maturity date, and have a Balance to Income Ratio (BTI) of more than 12 times your monthly income.

Thankfully, licensed money lenders have a more flexible Debt Consolidation Plan with less rigid requirements. In addition, since you won’t be able to use your existing unsecured credit cards, they can grant you a custom personal loan for your everyday expenses.

Debt settlement explained

What is debt settlement?

While debt consolidation combines multiple debts into a single loan where you still need to pay everything off, debt settlement, as the term suggests, involves reaching a settlement. There are two ways to settle a debt.

The first involves appealing for a more affordable payment plan from your creditor. For instance, you may write to your bank to request that they allow you to pay smaller instalments over a longer loan tenure.

The second involves asking your creditors to reduce the amount you have to pay, effectively giving you a discount. For this second way of settlement, the catch is that you would have to pay it in lump sum by an agreed date.

What are its advantages?

Since the first method 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 become debt-free without paying the full amount owed.

What are its disadvantages?

While paying less than what you owe sounds attractive, there are two main disadvantages to going down this route. First, you must have a substantial amount of cash on hand. The amount has to be attractive enough for the creditor to consider settlement. Hence, you can only settle your debt this way if you can raise the money, which could involve liquidating your assets.

The other disadvantage is that debt settlement may harm your credit score. This is because, by its very nature, a credit score is a record of how well you pay off your debts. How badly your score is affected depends on the creditor’s reporting practices, the size of your debt, the difference between the amount owed and paid, and various other factors.

Which should you choose?

If you are still confused about which option to choose, here’s a nifty pros and cons list for both debt consolidation and debt settlement to make it easier for you to pick one.

Infographic on debt consolidation loan vs debt settlement

If you can raise a large amount of money and aren’t put off by bad credit scores, consider settling your debt by asking for a discount. Or settle your debt by asking for a more affordable payment plan depending on your relationship with your creditor.

Otherwise, getting a debt consolidation loan is a good option to slowly pay off all your debts. However, make sure you stick to the plan and fulfil the monthly payments so you don’t have to accrue more interest than necessary. For more flexible arrangements, licensed money lenders like R2D Credit may be just what you’re looking for.


About the Author
Weetee Neu
Weetee Neu

Weetee Neu is a writer based in Singapore. He has written for MediaCorp, SPH magazines, Tripzilla and others.


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