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Debt management

Here's how to cut down the most common types of debt.

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Kyle Morgan
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The older you get, the easier it is to see practical reasons why so many of us use a credit card or borrow money for a car, house, vacation or any other major expense. Debt can eat into our pay and savings for months or years on end.

Instead of letting these debts gnaw away at your money, you can use this guide to take control of them.

What kind of debt do you have?

managing and repaying your credit card debt will help you gain control of your finances

How to manage your credit card debt

Credit card interest rates can be high and pile on the extra charges quickly so it’s important to get on top of your balance (or balances) as soon as possible. Here’s what to do:

Make regular repayments

Always make at least the minimum payment before the due date. If you’re someone who tends to be forgetful, use the autopay option to ensure you’ll never miss a payment.

Usually you’ll have to pay 1% to 3% of your balance. But, since interest is calculated based on your daily balance, you can actually reduce the amount of interest that’s charged each month by making additional repayments.

Example: How much can you save by changing payment frequency?

Let’s say your credit card debt is $5,000 and your minimum repayment amount is 2% or around $100 per month. If your card’s interest rate was 18%, here are the different interest charges you’d get depending on your payment options:

  • Monthly payments of $100: $45.86 in interest per month
  • Biweekly payments of $50: $44.83 in interest per month
  • Weekly payments of $25: $44.64 in interest per month

When compared to monthly payments, you can save around 3.3% by making payments biweekly and 3.6% by making weekly payments. The more you pay overall, the better the savings could be.

* This is a fictional, but realistic, example.

Pay more than the minimum

It would take years to pay off your credit card if you only paid the minimum each statement. Check out this example:

DebtInterest rateMonthly paymentTotal cost with interestYears to pay off
$5,00018%Minimum of 2% monthly$17,18133 years
$5,00018%$300$5,6981 year and 7 months

It would take 33 years to clear the balance paying only the minimum. But if you paid $300 per month, your credit card debt would be paid in 1 year and 7 months and cost a total of $5,698. That’s big savings.

0% balance transfer

Consider moving your debt to a card that offers 0% interest during the introductory period. Balance transfer credit cards give you a window of time to make repayments without accruing extra interest.

The only thing to be aware of is that at the end of the promotional period, the 0% interest rate reverts to a higher standard rate. So ideally, you want to be able to clear your debt before that happens.

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manage your car loan repayments

How to repay your car loan

Whether it’s your first set of wheels or a shiny new upgrade, a car loan is a popular way to finance the purchase. But vehicles depreciate and in a few years you could find yourself stuck making payments on a car that’s not worth half as much anymore. Here’s what you can do about it.

Make additional repayments

Early settlement for car loans in Singapore is calculated using the Rule of 78. This is a formula used to compute the interest charged on a loan across its payment period. While this may seem like a rather complex calculation, it only requires a few steps which we’ll illustrate in the example below.

Calculate your outstanding instalment amount

Let’s say you have a 5-year loan of $50,000 at 2.5% interest p.a. and you want to pay off your loan early after 25 months.

Loan amount = $50,000
Loan period = 5 years originally
Interest rate = 2.5% p.a.
Total interest payable = (2.5% × 5 years × $50,000.00) = $6,250
Total amount owed = ($50,000 + $6,250) = $56,250
Instalments already paid (for 25 months) = ($56,250/60) × 25 = $23,437.50
Outstanding instalment amount = $56,250 – $23,437.50 = $32,812.50

The Rule of 78

In this step, we’ll calculate the interest rebate on the outstanding loan period (which is 35 months, based on the example above). The bank will then charge a percentage of this as a fee for early repayment. This fee percentage may differ between lenders, but most Singapore banks generally fix the rate at 20%.
The formula to calculate interest rebate is:
(n[n+1] ÷ N[N+1]) × Total Terms Charges where:
“n” represents the balance loan period in months.
“N” represents the original loan period in months.
Total Term Charges represents the total amount of interest payable over the loan period.

Interest rebate on the remaining 35 months, according to Rule of 78:
= (35[35+1])/(60[60+1]) × $6,250 = $2,151.64

80% of interest rebate = $2,151.64 x 80% = $1,721.31
20% bank fee = $2,151.64 × 20% = $430.33

Calculating the early redemption penalty

Just like the portion from the interest rebate charged as a fee, different lenders may charge different amounts for this early settlement penalty. Since most local banks charge 1% of the total financed amount, we’ll calculate it based on our example above.

1% of total financed amount ($50,000) = $500

Final amount payable

The balance payable for early redemption would be
= Remaining instalment amount – 80% of interest rebate + 1% of total financed amount
= $32,812.50 – $1,721.31 + $500.00
= $31,591.19

Bear in mind that the final amount payable might differ if you’ve received a rebate for your loan, so always check with your lender on the exact loan redemption amount that you’ll need to pay.

Consider refinancing your car loan

If your current car loan is costing you too much, it’s possible to switch to a loan from a different lender. This can help you save on interest, additional fees and even offer more flexibility with repayments.

Be sure to weigh the costs first, as refinancing could lead to exit fees from your old loan and processing fees for the new one. Compare your options to see if refinancing will help you save money and pay off your car faster.

repaying student loans and managing student debt

How to cut down your student debt

There are lots of financial factors that can lead to debt when heading off to college. From student loans, credit cards, personal loans and car loans for students, here’s what you need to know.

Student loan debts

Unless you pay your tuition upfront, you’ll likely be taking out a student loan to help pay for postgraduate studies. Whether it be a government or private student loan, there are a few ways to score better interest rates and get out of debt quicker.

  • Refinancing. By refinancing your student loan debt, you are simply taking your original loan and shopping around for better interest rates and payment terms.
  • Consolidating. Consolidating is essentially the same process as refinancing, except it involves multiple loans. This could simplify 2 or 3 different payments into 1 monthly payment.

Student credit cards

Getting a credit card when you’re a student can help you pay for textbooks, lodging and food. But, if you use the card irresponsibly, it can have a serious impact on your debt. So if you do decide to get a card, use the following tips to manage it responsibly:

  • Compare cards and choose one with low rates and fees.
  • Always budget for your repayments.
  • Aim to pay off the full amount by the due date on your statement.
  • Only use it when you know you can afford to pay it off by the due date.

learn how to repay your home loan debt

How to manage your mortgage

While the dream of owning a home or a bunch of investment properties is very appealing, mortgage repayments can quickly bring us back down to earth. Still, your dream for property can become a reality and stay affordable with the following tips.

Change your payment frequency

Interest on your mortgage is calculated daily and paid monthly. This means you could save some money on interest charges by choosing to pay in biweekly or weekly instalments. Just make sure to check the restrictions and terms based on your payment frequency.

Pay more than required

If your loan allows it, you could save a small fortune by paying extra on the monthly amount. There are a few different ways you could do this:

  • Lump sums. If you come into a large amount of money, you could put a chunk of it towards your home loan to shave off some of what you owe.
  • Higher repayments. Paying more than what’s required for the month will help reduce the cost in the long run.

Even a small amount can have a big difference over the long term. Always check the terms and conditions of your loan to make sure extra payments won’t attract additional fees or variations.

personal-loan-debt

Paying off a personal loan

Personal loans can be used for just about anything from financing a vacation to paying for large purchases or consolidating debt. Depending on the type of loan you get, you could consider some of the following strategies to keep your debt at bay.

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  • Make additional payments. Usually available for unsecured personal loans, this strategy allows you to save money on interest and pay off your loan faster and earlier.
  • Choose a short repayment term. You’ll pay less each month with a longer term, but it will end up costing more over the life of the loan. By opting for the shortest loan term you can afford, you’ll keep costs down. You can always contact your issuer to request a longer or shorter loan term.
  • Set up automatic payments. Personal loan repayments are usually the same each month, which makes them easy to budget for. To simplify repayments even more, you could look at setting up an autopay so you don’t have to do it manually every month.
  • Move the remaining debt to a 0% credit card. If you have a small balance on your personal loan, you could save money by moving it to a credit card that offers 0% interest on balance transfers for a promotional period. Before you apply, make sure you compare your options and consider whether you’ll be able to pay off the balance during the promotional period.

What if I can’t manage my debts?

If you’re seriously struggling with some or all of your debts, try to stay calm and follow these steps.

  1. Contact your provider/s and let them know your situation. They will be able to help you find a solution that works for everyone.
  2. Consider debt relief. Debt settlement companies work on your behalf to negotiate your balances and set up payment plans, which could save you up to 30% on your debt.

Along with bills and taxes, debts are a major part of adult life. But with these tools at hand, you should be able to get on top of the money you owe and pay off your balances in a way that’s affordable for you.

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