A Debt Consolidation Plan (DCP), works by taking out a new loan to pay off your existing loans and debts. It is also called debt restructuring by some lenders.
2 reasons why you can consider that -
1) if the new loan has a lower interest rate than your current one/s, you can save money on interest each month and may be able to pay off your debts faster.
2)Or if the new loan has a longer tenure (up to 10 years for version 1) you may be able to lower your monthly payment making it easier for you to service them each month.
There are 2 versions of DCP. One is a scheme offered by The Associations Of Banks Of Singapore and its participating institutes and is suitable for unsecured debt on all credit cards and unsecured credit facilities with these financial institutions in Singapore, that exceed 12 times one’s monthly income.
The other type is offered by lenders who are not members of the association and could apply to any type of outstanding loan—secured or unsecured—with any category of lender. Some lenders and loan brokers are marketing using personal loans as debt consolidation to repay your existing debt. While technically you can do so, the assessment methods are different and you may end up paying more.
E.g you have existing debts of $5,000 total with 3 different lenders of different interest, quantum, start dates and tenure.
A lender that takes over these debts is doing so, either because he has a new "bulk" customer and is willing to give a discount and thus lower interest rate, or the interest environment has improved and he has a better margin (cost of lending vs cost of his funds). But from a risk point of view, unless he is aware of the 3 other lenders you will be paying off - to him you will now have $10,000 outstanding from 4 lenders, especially when he can see your debt level via your DSR and you may be deemed a riskier borrower and he would have to factor that in, in determining how much interest to charge you.
Other terms commonly used for debt consolidation include Debt Refinancing, Loan Consolidation, Consolidation Loan, Credit Consolidation, Debt Management Loan, and Debt Relief Loan. At times, lenders may invent fancy-sounding names purely for branding purposes, but they’re often referring to the same thing.
To learn more about misleading loan labels and how to spot real versus rebranded terms, check out our article:
Don’t Be Clickbaited by Fancy Loan Types That Don’t Exist.