Debt Consolidation Plan: What you need to know

 Financial experts advise individuals to shop around for banks that offer the most attractive borrowing terms. Not only do the rates vary, but also the terms and conditions.
Financial experts advise individuals to shop around for banks that offer the most attractive borrowing terms. Not only do the rates vary, but also the terms and conditions. PHOTO: ST FILE

Q Who is eligible for DCP?

A To be eligible, you must be a Singapore citizen or permanent resident, earn between $20,000 and $120,000 a year or have net personal assets less than $2 million, and have total interest-bearing unsecured debt on all credit cards and unsecured credit facilities with financial institutions here that exceeds 12 times your monthly income.

Net personal assets refer to the total value of your assets less liabilities.

Q Who are the participating financial institutions?

A The 14 participants are: American Express International, ANZ Bank, Bank of China, CIMB, Citibank, DBS Bank, Diners Club, HSBC Bank, Industrial and Commercial Bank of China, Standard Chartered Bank, Maybank, OCBC, RHB and United Overseas Bank.

The list of financial institutions may be revised from time to time.

Q How do the DCP's interest rates compare with credit card and credit line rates?

A "As opposed to the differing minimum payment amounts of credit cards and credit lines, the DCP's payment amount per month is fixed for an agreed period with the bank," said Ms Choo Wan Sim, head of cards and payments, Singapore, at UOB.

The DCP's effective interest rates are generally lower than credit card and credit line rates. Still, it is prudent to do a comparision as the rates and terms vary among the participating financial institutions.

For instance, Maybank says its effective interest rates can go as low as 8.48 per cent a year but will vary case by case after credit evaluation. From now till April 30, it is offering $388 cash rebates to the first 300 eligible customers upon approval of their DCP loans.

There could also be promotional rates offered from time to time. UOB is offering a promotional effective interest rate of 5.27 per cent a year (till March 31) for its DCP's first year and 14.15 per cent a year thereafter from the second to fifth year. This works out to an effective interest rate of 11.08 per cent a year over the five-year loan tenure.

HSBC's promotional offer is 8.5 per cent a year for a five-year DCP. The promotion ends on April 30.

Q Which DCP should I choose?

A Financial experts advise individuals to shop around for banks that offer the most attractive borrowing terms. Not only do the rates vary, but also the terms and conditions.

For example, Mr Vikas Kumar, head of cards and personal loans at Citibank, said DCP customers are offered complimentary protection insurance coverage (on accidental death, total permanent disablement and involuntary employment disruption) of up to $160,000.

SOME FLEXIBILITY

The best DCP plan will allow the individual to switch to another bank at lowest or no cost if another bank offers a more attractive package.

MR KUO HOW NAM, chairman of Credit Counselling Singapore

Mr Kuo How Nam, chairman of Credit Counselling Singapore (CCS), said: "Individuals need to look carefully at the terms, especially the interest charges, and other upfront charges, as well as the costs of terminating or premature payment of the DCP. The best DCP plan will allow the individual to switch to another bank at lowest or no cost if another bank offers a more attractive package."

CCS' general manager Tan Huey Min recommends looking for a DCP where the monthly instalment amounts "fits your pocket". She said: "What's your servicing capacity, after taking into account your daily, weekly, monthly living expenses cum adhoc expenses? If you are left with $600, you should look for a payment plan that requires you to service $600 or less."

Mr Kuo said: "An individual should also note that since his borrowing is now consolidated with one bank, there is a higher likelihood of the bank taking legal action, going all the way to bankruptcy, if he defaults."

Q What will the total DCP amount be?

A The DCP amount is equivalent to the total principal outstanding including interest and any other fees and/or charges accruing on your statemented accounts, plus an additional 5 per cent allowance over and above the total DCP amount, for the first DCP.

If the approved DCP amount is insufficient to repay your outstanding under any existing unsecured credit facilities in full, you will remain responsible for paying off the balance of these amounts directly to your existing financial institutions.

Q What is the purpose of the additional 5 per cent over and above the total DCP amount?

A It is to cater for any incidental charges, such as interest and fees payable, incurred from the time the DCP is approved till the time the disbursed DCP amount is received by the financial institutions.

Q Why am I granted a revolving credit facility with my DCP, capped at one month of my income?

A You will automatically be given a revolving credit facility to provide you with a convenient mode of payment for managing your daily essentials. Do check on the facility's fees and charges.

This credit facility and the DCP are bundled as a single product. However, you can choose not to use the revolving credit facility should you not have any need for it.

Maybank said that this is exceptionally appealing to customers who want to take control of their financial situation, and yet continue to enjoy the various perks and offers on the credit cards/unsecured credit line.

"For example, customers who consolidate with Maybank can still enjoy up to 8 per cent cash rebate for their purchases and complimentary travel insurance when they charge to their Maybank credit card," said Mr Choong Wai Hong, head of community financial services, Maybank Singapore.

Q Can I continue to use my existing credit facilities after I apply for DCP but before it's being approved?

A No. Further usage of existing unsecured credit facilities will not be allowed once a borrower decides to take up the DCP.

Q What happens to my unsecured credit facilities once my DCP application is approved?

A Mr Matthias Dekan, head of customer value management, HSBC Singapore, said that once an individual is on a DCP, he or she will no longer have access to their unsecured credit facilities. They will be closed or suspended. This prevents the individual from sliding deeper into debt, he added.

However, you are still able to use the revolving credit facility capped at one month of your income.

Q When can I start applying for new facilities?

A You can start applying for new unsecured credit facilities with another financial institution once your overall BTI (balance-to-income ratio) reduces to or below eight times your monthly income; or with the DCP financial institution once your overall BTI reduces to below four times your monthly income.

BTI is your total unsecured outstanding balance divided by monthly income.

Q How will my Credit Bureau records be impacted if I take up DCP?

A Your Credit Bureau record will be updated with the "Debt Consolidation" product code as the DCP is viewed to be a unsecured credit product.

Credit information will stay on your Credit Bureau report for three years after DCP closure, as is the practice for other products.

Q How do I compare the DCP offered by the 14 financial institutions?

A Mr Rohith Murthy, managing director of SingSaver.com.sg, encourages borrowers to compare DCP at www.singsaver.com.sg/personal- loan/debt-consolidation/ to find the most suitable DCP for them. The platform now has the DCP of Citibank and HSBC, and the other DCP participating institutions will be added in the coming months.

Lorna Tan

A version of this article appeared in the print edition of The Sunday Times on March 05, 2017, with the headline 'Debt Consolidation Plan: What you need to know'. Print Edition | Subscribe