3 Things to Consider Before Applying for Debt Consolidation

If you’re in a tight financial situation, you could have a problem with paying off several debts. But it can be challenging to keep up with different due dates, payable amounts, and interest rates. You may even miss some payments, resulting in interest piling up.

3 Things to Consider Before Applying for Debt Consolidation

Thankfully, you can pool your debts into a Debt Consolidation Plan (DCP) to make repayments easier. Banks or money lenders will pool all of your existing debts into one large loan. You no longer have to pay back different financial institutions for each individual debt. Instead, you will only pay the bank or money lender that arranged the DCP. 

While a DCP may sound like a good idea in principle, it’s not for everyone. Consider these three things first before applying for a DCP.

Are you qualified?

Under Singaporean laws, there are certain qualifications you need before you can consolidate your debts. These are the basic criteria:

  1. You must be a Singapore citizen or Permanent Resident.
  2. Your annual income must be between $20,000 and $120,000, and your Net Personal Assets (the total value of all your assets minus all your liabilities) must be less than $2 million.
  3. The total of all your interest-bearing unsecured debts is more than 12 times your monthly income.

Unsecured debts include credit cards and personal loans from either banks or money lenders. Basically, these are debts that do not require any collateral. 

If you meet all three of the qualifications, you can apply for a DCP. But this is not the only thing you must consider.

Can you afford to make larger payments per month?

The biggest advantage of a DCP is you can save on interest payments overall. The interest rate of a DCP is often much lower than the combined interest of your individual debts. But there is a catch.

With a DCP, your monthly payments will be higher. You need to consider whether you can make these payments; otherwise, you will face late payment fees and interest. If you are not capable of making these higher payments, you will pile up more debt instead of paying them off.

But if you can control your spending habits to prioritize your loan repayments, getting a DCP is a good idea. It will help you get out of debt faster and more affordably.

Consider the effective interest rate (EIR) and charges of debt consolidation plans

Financial institutions offering DCPs often advertise an annual interest rate (AIR). Take note that the AIR is not the only consideration; there are also administrative charges and late payment fees. With these, the real cost of consolidating your debts may be higher than what the advertised numbers tell you.

To get an idea of the true cost of a DCP, consider the effective interest rate (EIR). The EIR accounts for all other charges and fees applied to the DCP, so it is often higher than the AIR.

Thus, shop around for DCPs that have relatively lower EIRs. This way, you can save money overall on your loan repayments.


If you are faced with debts from more than one source, and you’re having trouble keeping up, consolidating your debts may be right for you. If you are qualified and can afford to make higher payments per month, a DCP can help you escape the debt trap faster.

3 Things to Consider Before Applying for Debt Consolidation
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