Runaway debt can be difficult to handle and will cause many people lots of worries. When you are able to use your credit correctly, having a debt needs not be an issue. Thus said, there are times when you might find yourself stuck with a huge loan.
To ensure that you are able to repay your loans smoothly here are a number of easy actions that will help you do so in a hassle-free way. You can apply these tried and proven hacks to repay back your debt hence being in control of your credit.
Switch To Low-interest Loans
Every month, there are two to three banks that offer low-interest rates to Singaporeans, while the rest remain more expensive. Therefore, you can take advantage of this. For instance, assuming you hold credit card debt of S$15,000 which accumulates with an interest of 26% each year.
Following a research, you find out that you are able to obtain a personal loan charging 4.5% per year which is a lot cheaper compared to that of a credit card. You may then take the personal loan of S$15,000 at 4.5%, and use it to repay your credit card. The 26% a year loan now becomes a 4.5% a year loan.*
It’s key you stay disciplined after this; don’t immediately use the card again. Actually, you need to cancel this card after you pay it off, to avoid any temptation. You can later apply for a new card once the loan is fully paid.
Save Even As You Repay Your Debt
Do your best not to put all your money into debt repayments. Make sure you have some left as savings; this will help you manage any emergencies. Having no savings many times results in you taking loans or credit cards, thus ruining your repayments, and getting you stuck in endless debt cycles. Save at least 20% of your earnings, until you reach at least 6-months of expenses. Thereafter you can put all the money for debt repayments.
Use The Stack Method
Always order your debts from those with the highest interest to the lowest. Then focus on repaying the highest interest debt first. For the rest, make minimum repayments till you are able to repay them as well. This is known as the stacking technique: once the high-interest credits are fully paid, you will have extra money which you can use to repay the cheaper loans. You will also be saving more money since you are minimizing the interest amount on repayments.
You will likely find the stack technique working for you when you start getting balances on several credit cards. When all of your cards have about the same interests, consider repaying the smallest debts first. You will get a major psychological boost once the first credit cards get cleared of debts owed, it will motivate you to continue the good work.
Use The Cash-out Refinancing
When your debt is a larger amount such as above S$100,000, yet you own a fully paid private property, you may consider a cash-out refinancing. This will allow you to take a loan using your home as collateral. The loan amount is huge, about 80% of your home price. Of importance is the low-interest rate because your home is the collateral. Cash-out loans have interest as low as 1.6% a year.
This can also be an option to selling your house. When you want to retain your home as you repay your debts, it can be the next possible compromise. (Note: you should have a private property for you to do this. An HDB flat can’t be cashed-out.)
Consider Balance Transfers For Your Short-Term Debts
When you can repay your debt in about 6-months, consider using the balance transfer to reduce your interest payments. Balance transfers allow you to shift debt from one card to another, for a one-off fee. After the transfer is completed, you will get an interest-free time to pay off the debt.
It’s a good way of saving money if you are certain you will repay the whole debt within the zero-interest period. It’s useful in circumstances when you have overshot a budget by a modest amount such as the home renovations cost more than you expected, and you required another loan. Remember to repay the whole loan before charging more things to the credit cards.
If your loan can’t be repaid in 6-12months, you could alternatively consider taking a lower interest rate personal loan. This is since the balance transfer moves back to the existing interest rate which is normally between 24-26 %a year, once the zero- interest period is over.
Restructure Your Debt
When it comes to the point of a possible default, your moneylender will prefer getting some of the loan money back, than having none at all. Having this in mind, you can use the help of your debt counsellor, or even through direct discussions, to have your bank adjust your repayment scheme. This is in particularly useful when unexpected situations happen, such as being retrenched. Your bank may for the moment freeze your interests, or even lower them and then increase the loan tenure. In severe cases, they might forego a part of the money you owe.
These options may harm your credit score, possibly for several years. However, when you don’t have a way of repaying your loans, opt for this anyway. If not, the damage may be a lot worse, when the bank is forced to cancel your loan. A default of this extent might mar your credit score forever.
Stop Credit Lines While You Settle Your Debts
When you hold several sources of credit, once you have finished repaying them be sure to close them off. Continue doing this until all are fully paid off, and after that, you can consider taking a new credit card or loan.
Doing this stop temptation: you won’t be tempted to use the credit again, even while you work on repaying it. Furthermore, consider retaining one to two credit cards in future, when you realize you’re easily lured to spend.