How Does A Debt Consolidation Loan Work?

Personal Finance

How Does A Debt Consolidation Loan Work?

November 25, 2022

Sometimes, the best laid financial plans go awry when life throws a couple of curveballs your way. When this happens, it’s easy to get caught up in debts that cast you into a sea of confusion and helplessness.

The solution is to tie all those debts into a debt consolidation loan. With your focus on only one debt, you can repay the debt better, so you do not feel overwhelmed.

But how does debt consolidation loan work?

In this article, we’ll explain what debt consolidation in Singapore is about, how debt consolidation loan works, its qualifying criteria, and how much you can borrow.

Read on to see how you can resolve all your debts by turning them into a single low-interest loan that is easier to repay.

What Is A Debt Consolidation Loan?

A debt consolidation loan allows you to merge or consolidate debt loans into a single loan payment.

This simplifies the number of payments you need to make and also lowers your monthly payments. You then repay the consolidation loan, like you would a personal loan, in the agreed period.

You can get a debt consolidation loan from licensed money lenders. With a debt consolidation loan, you borrow the money you need to clear all your debt commitments and now only owe a single lender.

But a debt consolidation loan in Singapore is only recommended if your outstanding debt is 12 times or more than your monthly salary.

If your debt amount is less than that, apply for a balance transfer or a personal installment loan. Another condition is that you must be a Singaporean or permanent resident to apply for the loan.

A debt consolidation loan is sometimes confused with a debt consolidation plan (DCP). In fact, both types of loans are sometimes used interchangeably.

What Is A Debt Consolidation Plan?

A DCP was announced by the Association of Banks in Singapore (ABS) in 2017. It is only offered by banks.

A DCP allows you to:

  • Lower your monthly payments
  • Reduce your loan’s interest rates and other charges
  • Improve your credit score
  • Make it easier to pay your bills

A DCP can be used for unsecured loans such as:

  • Personal loans
  • Credit lines
  • Credit cards

When applying for a DCP with a bank:

  • You must earn between $30,000 and $120,000 annually to qualify
  • Your debt must amount to 12 or more times your monthly income
  • Have net personal assets of less than $2 million
  • You may need additional documents such as your latest Credit Bureau Report and a settlement letter from the original bank you borrowed from

The criteria is fairly strict for banks.

You can get a debt consolidation plan from the following financial institutions in Singapore:

  • American Express International, Inc.
  • HL Bank
  • HSBC Bank Limited
  • Maybank Singapore Limited
  • CIMB Bank Berhad
  • Citibank Singapore Limited
  • Bank of China Limited Singapore
  • Diners Club Singapore Pte Limited
  • Standard Chartered Bank
  • RHB Bank Berhad
  • Industrial and Commercial Bank of China Limited
  • DBS/POSB Bank Limited
  • United Overseas Bank Limited
  • Oversea-Chinese Banking Corporation Limited

However, there are some unsecured credit facilities that a debt consolidation plan can’t finance, such as:

  • Business loans
  • Medical loans
  • Education loans
  • Joint accounts
  • Renovation credit facilities

How Does A Debt Consolidation Loan Work?

Managing several debts from different lenders is not easy. Some people have multiple bank loans, personal debts, and credit card debts that they must pay every month. Each has a unique interest rate, fees payable, charges, and due dates, and the payments have to be sent to different accounts.

This is a tedious process – not only financially but also mentally. But loans for consolidating debt help you get rid of this burden.

The process of bringing your debts under one roof is straightforward:

1. Gather all your paperwork and any other relevant information you have relating to your current loans and debts.

2. Add all the money you owe, including the interest and any fees or charges imposed. Take your time to ensure you include every associated cost, so you do not leave out any liability.

3. After determining exactly how much you owe, approach a debt consolidation plan money lender and apply for a loan.

4. If your application is approved, pay all the outstanding debts. You are now left with one low-interest loan that you can pay comfortably.

How To Use A Debt Consolidation Calculator

Calculating your total debt can be tricky because loans are dynamic and vary depending on the loan amount, loan tenure, income, and citizenship status.

It’s easy to miss out some details if you try to calculate the debt by yourself, so use a debt consolidation calculator.

Find a debt consolidation calculator online and accurately type in the specific variables in each category. Enter the loan balances, the interest rates, and the monthly payments you currently make toward your debts.

Enter only the unsecured loans because secured debts such as student loans and car loans are managed differently.

After entering the data, wait for the results. You should see the following:

  • Total balance, or the sum of your debts
  • Total monthly payment is the total amount you pay towards your debts. It includes the interest paid.
  • The combined interest rate is the average weighted interest rate imposed on the  debts you entered.
  • The time it would take to be debt-free is based on the remaining principal amount and your monthly payments.

These results will help you determine if getting a debt consolidation loan is the right step to take.

Review all the consolidation options and what each would look like, given the loan term you desire for the new loan. Choose a consolidation plan that best fits your budget and financial goals.

Compare your current debts and the new consolidation plan. Debt consolidation will only make sense if the total payment you would make with the new plan is less than the total payment with the current debt plans, as this saves you interest costs.

How Much Can You Borrow?

Typically, a money lender or bank should be able to lend you an amount equal to the sum of your outstanding debts plus all the charges or fees accrued, as indicated by your statement of accounts.

But there may be instances where the debt consolidation loan approved is less than your outstanding balances. In such cases, the lender will give you the loan money directly and charge you with the responsibility of giving back the money to your lenders.

Besides the total debt amount, your first debt consolidation plan will also include an additional 5% allowance to help you settle incidental charges that you may have incurred from when your loan was approved to when you received the funds.

But this 5% allowance is deposited directly to your lenders and not into your current or savings account. If the allowance settles the accruing charges and some amount is left over, the balance will be given to you.

Qualifying Criteria

To qualify for a debt consolidation loan, you must be:

  • A Singaporean or permanent resident
  • Not holding any other existing debt consolidation loan

You can apply for a debt consolidation loan from most licensed money lenders in Singapore, including Credit Thirty3.

Note that you are not bound to stick to your debt consolidation loan. You can refinance it with a loan from a different money lender or bank.

Be sure to check with the first institution if doing so would attract a penalty fee for premature termination of the first debt consolidation loan.

Another important fact is that once you are in a debt consolidation loan, you cannot apply for a new loan or credit card until your debt falls to less than eight times your monthly salary. This way, your focus remains on one loan until it becomes manageable.

Most financial institutions can accord you a debt consolidation loan or plan even if you do not bank with them. But, take note of each institution’s rates, terms, and conditions because they determine the cost of the loan.


Suppose you fail to qualify for a debt consolidation loan due to your citizenship status or the outstanding unsecured loan balance requirement.

In that case, you may opt for a personal loan, and you can pay off those of your debts that have highest interest rates.

For example, you can pay off the credit card bill and any other high-interest debt first, then continue paying the low-interest debts with time.

In the meantime, avoid increasing your debt through late payments that attract penalties.

Choose The Right Debt Consolidation Loan Money Lender

Now that you know how does debt consolidation loan work, consider getting your debt consolidation plan from Credit Thirty3. We offer unsecured debt consolidation loans to make your debt repayment more convenient.

The application process is straightforward and should not take more than five minutes. Contact us now or apply for the loan today.