The new Debt Consolidation Plan (DCP) offers welcome relief to borrowers who find themselves in deep despair under a mountain of debt.
Under the scheme, eligible borrowers can now reduce their debt burden and consolidate their outstanding balances across various banks, by nominating one participating financial institution to gather together all their debt.
The scheme is meant to help borrowers with interest-bearing unsecured debt exceeding 12 times their monthly income - in other words, those snowed under with debt.
The simpler repayment process is offered by 14 financial institutions here including the three local banks and other retail banks such as Citibank, HSBC and Maybank.
The DCP is timely as it comes ahead of a tighter industry-wide borrowing limit. From June 1 this year, the limit will be 18 times a person's monthly income, moving to 12 times monthly income by June 2019 - which will be half the limit of the 24 times monthly income now.
Unsecured debts are those with no collateral, such as red ink run-up on credit cards, personal loans or an overdraft.
With DCP, the bank chosen by the borrower can, in effect, buy over all other existing unsecured credit of a customer held by other lenders, and then structure a repayment scheme for the borrower stretching for as long as 10 years, such that the borrower will still meet the tighter regulatory limits.
For years now, banks have offered promotional rates through a product called balance transfer, so that a bank can, in effect, buy existing credit-card debt of revolving borrowers from competing lenders.
The DCP offers a formal framework for that sort of arrangement.
Mr Choong Wai Hong, head of community financial services at Maybank Singapore, says customers who are servicing multiple unsecured bank loans will find DCP most helpful, as they no longer have to deal with the various due dates from different card companies, which can be confusing and difficult to manage. This simpler approach will reduce the incidence of missed payments which result in additional charges - and deeper debt.
"Under DCP, customers need only to focus on their unsecured borrowings consolidated under one bank of choice, with only one payment date to remember. This will help them to be more organised in managing their finances," said Mr Choong.
One immediate benefit of DCP is the lower interest rate imposed on unsecured loans. Borrowers paying the prevailing rate, typically at 24 per cent a year and above, can expect to consolidate under DCP at a significantly better interest rate of, say, 10 per cent, depending on the plan's terms and conditions.
Mr Anthony Seow, head of cards and unsecured loans at DBS Bank, said that in general, a customer without DCP would likely be paying around 3 per cent of his total outstanding amount on a monthly basis at an effective interest rate above 20 per cent a year.
With DCP, the monthly repayment would be around 2 per cent of his total outstanding amount and at an effective interest rate in excess of 10 per cent a year.
Mr Kuo How Nam, chairman of Credit Counselling Singapore (CCS), said that DCP is a good product in that it gives an opportunity to people, who have been rolling over their debt, to take advantage of the lower interest rates. He said: "For some banks, the DCP interest rate charged is less than half the prevailing rates. Many people are at present struggling just to make the minimum monthly payment. The lower interest charges will make it easier to pay off their credit card debts."
CCS statistics show that the most common reason people get into debt is a heavy family burden such as parental support. Other reasons could be job, medical and business-related.
Mr Kenneth Tan, vice-president of group lifestyle and payment products at OCBC Bank, said those who are vulnerable to incurring large debts include customers who experience a reduction in income but still retain the same level of expenses, those going through a divorce and customers who made poor financial decisions and investments.