Reasons why you should not use a personal loan to pay off your credit card debt

Many people in Singapore have 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 they owe money to multiple creditors. There are multiple payments and due dates to keep track of, and continual reminders about your outstanding balance only add to the stress. As you fall behind on your payment due dates, your debts will only increase. One of the ways to get out of this debt trap is to have a personal loan known as a Debt Management Plan or DCP.

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

Benefits

• You only have to make a single payment each month since a DCP consolidates all your debts into one debt. This will help you save energy and time and reduce the stress of missing a payment since you no longer have to keep track of all the different creditors.

• The lower interest rates with a DCP make it easier to pay off all your debt and actually make visible progress.

• When a DCP is well managed, you have a better chance of saving some money instead of spending all of your monthly income paying bills.

drawbacks

• The biggest drawback to DCP is the potential to get further into debt. People who are not careful with their spending and have a habit of gambling are likely to get more into debt.

• Even with low interest rates, it may take longer to pay off your DCP debt. In the long run, this will lead to a higher interest payment. To avoid this, you need to focus on paying off your debt as soon as possible.

• Failure to make payments on time will result in penalties and interest, which will only increase your charges.

If you choose to transfer your DCP to other banks, you must do so three months after your DCP is sanctioned. You will be subject to penalties that the original bank may charge for early termination or transfer of your DCP. Since a long engagement with a DCP is required, you should do extensive research before applying for a plan.

Once you have taken out a Debt Settlement Plan, all your current credit card and unsecured debts are suspended. You will be offered a revolving credit equivalent to your salary for one month. You will not be eligible to apply for any new unsecured cards during the time your DCP is active, unless you have paid off a portion of your debt.

eligibility criteria

To be eligible for a DCP, you must be a Singaporean or permanent resident. You must have personal property worth less than S$2 million or your earnings must be in the range of S$20,000 and S$120,000 per year. Your consolidated unsecured debts must be more than 12 times your monthly income.

Fees associated with a debt management plan

There are some banks in Singapore that charge a flat processing fee, while 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 a few days. Personal loans are better than cash advances because of the fixed monthly payments and low interest rates.

A Debt Settlement Plan will help you pay a lower monthly amount with low interest rates. As a result, it will help you focus on just one contribution each month and be less financially stressed. A personal loan in the form of a Debt Management Plan will help you negotiate with your creditors to eliminate penalties to reduce your loan amount.