Reasons Why Shouldn’t Use A Personal Loan To Pay Off Your Credit Card Debt

Many people in Singapore hold multiple credit cards at the same time as each card has its own unique benefits. Under such circumstances, people can potentially fall into a debt trap as he/she owes money to several creditors. There are multiple payments and due dates to keep track of, and the non-stop reminders about unsettled balance only adds to the tension. As you fall behind the due dates of making the payments, your debts will only become larger. One of the way out from this debt trap is having a personal loan known as Debt Management Plan or DCP.

DCP was introduced by Association of Banks in Singapore (ABS) in the early part of 2017 for all Singapore nationals and Permanent Residents who are facing difficulty in settling their debts. DCP is a type of personal loan where you can borrow a lump sum amount to pay off all your current debts right away. However, you can take the help of a DCP only for unsecured credit facilities such as personal loans, credit cards and other credit lines. Let us take a look at some of the benefits and drawbacks of a Debt Settlement Plan:

Benefits

  • You only have to make a single payment per month as a DCP consolidates all your debts into a single debt. This will help you save your energy and time and cutting the stress of missing a payment, as you no longer have to keep track of all the different creditors.
  • Lower interest rates with a DCP makes it easier to pay off all your debts and actually make visible progress.
  • When a DCP is managed well, you have a better chance of saving some money instead of spending your whole monthly earnings on paying bills.

Drawbacks

  • The biggest drawback of DCP is the potential of getting into more debt. People who are not careful about their expenses and have a habit of gambling are prone to get themselves further into debt.
  • Even with low interest rates, you may take longer to pay back your debt with DCP. In the long run, this will lead to more interest payment. To avoid this, you must concentrate on paying off your debt as early as possible.
  • If you fail to make timely payments, fines and interests will be imposed, which will only enhance your burdens.

If you choose to transfer your DCP to other banks, you will have to do it three months after your DCP is sanctioned. You will be subject to penalty fees which the original bank may charge for early termination or transferring your DCP. Since a long commitment is required with a DCP, you should do your research extensively before applying for a plan.

Once you have taken a Debt Settlement Plan, all your prevailing credit cards and unsecured debts are adjourned. You will be offered a revolving credit equivalent to your one month’s salary. You will not be eligible to apply for any new unsecured cards during the time your DCP is active, unless you have repaid a part of your debt.

Eligibility criteria

To be eligible for a DCP, you must be a Singaporean or a Permanent Resident. You must have personal assets worth less than S$2 million or your earnings should be in the range of S$20,000 and S$120,000 a year. Your consolidated unsecured debts must exceed by over 12 times your monthly income.

Fees associated with a Debt Management Plan

There are a few banks in Singapore that charge a fixed processing fee while the others charge up to 3% of the sanctioned loan amount. You should opt for a personal loan to finance your crises if you can wait for a few days. Personal loans are better than cash advance because of fixed monthly payments and low interest rates.

A Debt Settlement Plan will help you pay lower monthly sum with low interest rates. As a result, it will help you focus on a single contribution every month and have less financial strain. A personal loan in the form of a Debt Management Plan will help you negotiate with your creditors for removal of penalties to make your loan amount lower.

A Personal Loan to Consolidate Credit Card Debt – Is it Recommendable?

When considering credit card debt consolidation, it might be tempting to get a personal loan rather than seeking the help or advice of a reputable consolidation company. After all, many individuals have successfully obtained personal loans for this purpose, thereby getting rid of a mountain of debt, replacing it with one monthly payment. However, for the consumer whose credit report is average to poor, or who already has a mountain of debt, finding a good interest rate can be next to impossible.

A personal loan can be used for any purpose, including the reduction or elimination of other debt. These loans do not eliminate debt all together, but transfers the debt from one lender to another. Personal loans can be unsecured or secured, but the most common loan is secured. Taking out a secured loan, which is often attached to one’s home or other property, to pay off unsecured credit card debt is not a wise decision.

On the other hand, obtaining a loan through a debt consolidation company provides a logical escape route from pressing indebtedness. These companies will pay off all of your debt, which will keep your credit rating in good standing. Then, you will be required to make one small monthly payment toward the total balance, which will include one small interest fee rather than numerous large ones.

In comparison to personal loans, credit card debt consolidation is the best option. Consolidation allows you to combine existing account balances into one single, easy to manage monthly payment. Since the goal of consolidating your debt is to help you get out of debt, the payment schedule is based on your personal financial circumstances. A personal loan, on the other hand, must be repaid based on the lender’s schedule.

Is it recommendable to get a personal loan and consolidate one’s debt? If the consumer is able to obtain an unsecured personal loan with a lower interest rate than their other debts, then it is an attractive option. However, since most debt consolidation candidates are already swimming in debt, few lenders are willing to lend large sums of money. The other option, a secured loan, turns old unsecured debt into debt that could potential rob you of your home, car, or other property. Secured personal loans, therefore, are not recommended.

Ultimately, choosing to participate in a credit card debt consolidation program or attempt to resolve one’s debt with a traditional loan is a personal decision. Consumers should be cautious about taking the first loan offer, while educating themselves about alternative financing options.