Runaway debt is worrisome and difficult to deal with. Use these 7 proven debt repayment hacks to get back in the driver's seat.
If you use credit responsibly, debt should never be a problem. That said, we’re going to be realists: at some point, you may find yourself saddled with a loan.
Here are some simple tricks you can use to make sure your debts are properly dealt with, while inflicting only a minimal amount of pain.
1. Make the Banks Pay for You (by Switching to Low-interest Loans)
On any given month, there will be two or three banks with the lowest interest rates, while the others are more expensive. You can use this to your advantage.
For example, say you owe S$15,000 in credit card debt. It accumulates at an interest rate of 26 per cent per annum.
After doing some searching, you discover that you can get a personal loan for just 4.5 per cent per annum; much cheaper than the credit card. You could then take out a personal loan for S$15,000 for 4.5 per cent, and use the money to pay off your credit card. Voila: your 26 per cent per annum loan has just become a 4.5 per cent per annum loan.*
You can use SingSaver.com to check which bank currently has the lowest interest rate. This changes all the time, so always compare before applying.
*It’s important to be disciplined after that; don’t start using the credit card again immediately. In fact, you should cancel the card after paying it off, to avoid temptation - you can apply for another credit card after the personal loan is paid off.
2. Save While You Pay Down Debt
Don’t throw all your money into debt repayments. If you don’t retain any savings, you won’t have money to cope with emergencies. This often results in using loans or credit cards again, thus undoing your repayments, and trapping you in a debt cycle.
Retain at least 20 per cent of your income as savings, until you have at least six months of expenses. Only then should you put all your money into debt repayment.
3. Pay From the Highest to the Lowest
Never pay your debts randomly. Rank your debts from the highest interest rate, to the lowest. Focus on paying off the highest interest rate debt first - for the others, just make minimum repayments until you can get to them.
This is called the stack method: once you finish paying the high-interest debts, you’ll have more money with which to repay cheaper loans. You’ll also save more money this way, as you’re minimising the amount of interest repayments.
You'll most likely find the stack method coming into play if you start having balances across multiple credit cards. If your cards all have roughly the same interest rates, consider clearing the smallest debt first. You'll get an important psychological boost once you clear the first (of many) credit cards you owe, giving you the fuel to keep up the good work.
4. Got a Truly Monstrous Debt? Consider Cash-out Refinancing
If your debt has reached monstrous amounts (e.g. more than S$100,000), and you own a paid-up private property, you may want to consider cash-out refinancing.
Cash-out refinancing allows you to borrow money, using your house as collateral. The loan quantum is huge, up to 80 per cent of your home value (in contrast, most personal loans are capped at four times your monthly income). More importantly, the interest rate is low because your house is the collateral - cash-out refinancing loans have interest rates as low as 1.6 per cent per annum.
This is also an alternative to selling your home. If you want to keep your house while paying off your debts, this could be the next best compromise.
(Note that you must own a private property to do this. You can’t cash out an HDB flat).
5. Use a Balance Transfer for Short-term Debts
If you can pay off your debt in say six months or so, consider using a balance transfer to minimise your interest payments.
A balance transfer allows you to transfer debt from one credit card to another, for a one-time fee (usually around 1.5 per cent of the principal borrowed). Once the transfer is complete, you will be given an interest-free period (typically six to 12 months) to repay the debt.
This is a good way to save money, if you’re confident you can repay the entirety of the debt within the interest-free period. It’s most useful in situations where you overshoot a budget by a moderate amount (e.g. the renovations of your house cost more than expected, and you needed another loan).
Just remember not to charge more things to your credit cards, until after the entire loan is paid off.
For loans that you can’t possibly pay in six or 12 months, consider using a lower interest personal loan instead (see point 1). This is because the balance transfer (which is taken out on your credit card) defaults back to the prevailing interest rate (usually between 24 to 26 per cent per annum) once the interest-free period is over.
6. Lost Your Income Source? Try to Restructure Your Debt
If it comes down to a possible default, your bank would rather get back some of their money, than none of it at all. With the help of a debt counsellor, or through direct negotiations, your bank can adjust your repayment plans. This is especially useful in unexpected situations, such as retrenchment.
The bank can temporarily freeze your interest rates, or lower the rate and stretch out the loan tenure. In extreme cases, they may take a haircut on the amount owed.(I.e., which means they forego a portion of what you owe).
All of these will damage your credit score, probably for a few years. However, if you have no way of servicing your loans, take this step anyway; otherwise the damage will be much worse, if the bank is forced to write off your loan. Such a default could mar your credit score for life.
7. Close off Credit Lines as You Finish Repayments
If you have multiple sources of credit, close them off as and when you finish repaying them. Keep doing this until you pay them all off, and then you can consider getting a new loan or credit card.
Doing this prevents temptation: you won’t be lured into using credit again, even as you’re working to pay it off.
Also, consider keeping to just one or two credit cards/credit lines in the future, if you find you’re easily tempted to spend.
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