Which Is Better – Debt Consolidation Or Personal Loan?

Written by Shannon Wong on March 23, 2023

There are many instances where you will require a loan. Fortunately, there are different types of loans in Singapore to help meet your financial needs tailored to your capabilities.

You can lessen your financial burden by taking a personal loan or applying for debt consolidation.

A personal loan will finance any immediate need, whereas a debt consolidation will help merge all your unsecured credit facilities in one loan.

However, you may not make sense of your financial situation if you don’t know which is better-debt consolidation or a personal loan.

If you are getting a loan for the first time or have too many debts and wondering about the best option to reduce your financial stress, here are tips to help you.

What Is A Debt Consolidation Loan?

A debt consolidation loan allows you to consolidate all your existing debts into one loan. If you have multiple debts in any form, you pay them in one single monthly payment.

You don’t require any collateral to apply. Also, it attracts low interest, which greatly assists in covering all your loans with high interest rates.

Debt consolidation loans in Singapore are a good option if you can meet your monthly repayments. This can help track your monthly bills instead of having multiple debts to budget for, which may overwhelm you in the long run.

What Is A Debt Consolidation Plan?

A debt consolidation plan (DCP) allows you to consolidate all your unsecured loans from different financial institutions to merge them into one loan.

The plan doesn’t cover all types of unsecured loans. It excludes the below:

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

Only some people are eligible for DCP. For a successful DCP, you have to meet the below criteria:

  • Be a Singapore or a permanent resident.
  • Your total outstanding debts have to be 12 times your monthly income.
  • Earn between $20,000 and $120,000 yearly with net personal assets of less than $2 million.

Note that DCP packages and interest rates vary. Factors affecting such include your monthly income, citizenship, loan amount, and the repayment period.

It would help to use a debt consolidation plan calculator to get a breakdown of the costs to pay and find a comfortable monthly repayment option.

Where To Get A Debt Consolidation Loan

You need to compare lenders to get the best interest rates deals to make your debts easier to pay off.

Different banks and financial institutions have different interest rates and charges. Choose the best to make it more manageable.

Some of the best banks for debt consolidation loans in Singapore include:

HSBC Debt Consolidation Plan

HSBC offers a competitive interest rate of 3.4% .p.a, with loan tenure of up to 10 years.

You may get a processing fee waived for your approved loans. But,there is a full repayment penalty of 5% of the repayment amount.

Standard Chartered Debt Consolidation Plan

You enjoy affordable interest rates as low as 3.48% p.a, with loan tenure of up to 10 years.

Again, there is a one-time processing fee of $199 and a full repayment penalty of $250 or 5% of your outstanding loan, whichever is higher.

DBS Debt Consolidation Plan

DBS offers interest rates from as low as 3.58% p.a, with loan tenure of up to eight years.

There is an early termination fee of 5% of your outstanding balance at the point you terminate. Besides, you incur a processing fee of $99 and a late fee of $90.

Note that the EIR of your loan will largely depend on the loan amount you apply for and your personal financial needs.

Debt Consolidation Loan Vs. Personal Loan

Basically, the two options serve the same purpose.

One best ways to streamline your finances would be to use debt consolidation or personal loans. Lenders offer them without the need for collateral.

The only major difference is that you may use a personal loan to cover almost any kind of financial need or consolidate your debts. However, you can only take up a debt consolidation loan to consolidate your debts.

Pros And Cons Of A Debt Consolidation Loan Vs Personal Loan

You can make a clear cut decision on whether to take a consolidation loan or a personal loan to ease your financial burden.

While both options have a single goal, knowing the pros and cons of each helps you understand what to consider.

Advantages Of Debt Consolidation Vs Personal Loan

Loans for consolidating debts may lessen your financial burden in many ways.

Below are three major benefits:

      1. Flexible Repayment Terms

Loan consolidation in Singapore allows borrowers to enjoy lower monthly instalments due to the extended repayment period. This makes the monthly repayments more manageable.

On the other hand, personal loans offer a fixed interest rate with a fixed tenure.

The longer the term, the less your monthly instalments will be. Nonetheless, you may pay more interest over time.

      2. Attractive Interest Rates

The lower interest rates are as a result of having one loan than paying for separate loans. This way, you can save more.  Also, low interest rates speed up your debt repayment.

This may be different from personal loans. Banks consider them riskier. Though they may offer short repayment periods, they charge high interest.

      3. Improve Credit Score

Taking a loan to consolidate debt can greatly improve your credit score. Yet, reducing the amount you owe will positively impact your credit score only if you manage to meet your monthly repayments.

Nevertheless, making too many inquiries for your personal loan may send the wrong message to banks, which could eventually affect your credit score.

Conversely, personal loans in Singapore have a strict credit score evaluation. You need to prove to your lender that you can meet your monthly goals without defaults.

Disadvantages Of Loans For Consolidating Debt Vs Personal Loans

Applying for a personal loan may be your best option than taking a loan to consolidate debt.

Here is why:

      1. High Overall Interest

The debt consolidation long loan tenure may result in paying more interest at the end of your repayment term. Such interest may vary depending on the financial institution and your credit history.

If a lender considers that you have a good repayment, you may enjoy low interest rates.

      2. Strict Eligibility

Unlike personal loans, which have a reasonably easy criterion to meet, you have to be heavily in debt to apply for a consolidation loan.

      3. Purpose

Borrowers can use personal loans for various purposes, such as emergencies, personal expenses, or debt consolidation. On the contrary, consolidation loans have a specific purpose; to merge your existing debts.

While consolidation loans seem a good idea, know that the debt will reflect on your credit score. Therefore, any defaults in payments will not only attract late fees and other charges but will damage your credit history.

Personal loans would be a good option for anyone with many financial concerns other than getting a loan to consolidate debts.

What To Consider Before Applying

Before applying for such loans, you must keep your financial situation in mind.

You can apply for Singapore debt consolidation loans or personal loans from banks. Another excellent alternative is to look for licensed money lenders.

Singapore debt consolidation loans are best if:

  • You want to gain control over your many debts.
  •  Your existing loans interest rates are high.
  • You will be paying lower interest rates compared to what you pay for your multiple existing debts.

Personal loans are best if:

  • You don’t want a limit on how to use your funds.
  •  You don’t want to linger in debts for long.
  • You want a quick way to access funds.

Both options require the financial discipline to stick to your monthly instalments. With this, it becomes easy to control your finances.

It’s advisable to choose a personal loan with flexible terms that you will afford.

Look for banks or licensed money lenders willing to offer such loans with lower fees wherever possible.

How To Get Out Of Your Tight Financial Situation

Personal and Singapore debt consolidation loans are favourable options for dealing with your debts. But knowing which is better- debt consolidation or personal loans will help you get out of your financial stress.

If you need more information for your financial need, 1AP Credit has got you covered. We assess your financial needs according to your financial position and provide a suitable solution. You can apply for a loan confidently and get the best deal.

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