When debt starts to build up and you spend your monthly salary just to pay back debt, this is a sign for you to know effective techniques to settle debt.You may have come across these 5 techniques before that you have saved and share on Facebook and Instagram.But, your debt will still be there without any action done. Hopefully this sharing will help you to be debt free as soon as possible.
Technique 1: Snowball
What is the Snowball technique?
This technique focuses on paying only one debt account at a time while making minimum payments to other debt accounts that you own. To simplify, you will focus on to settle debt with a smaller amount first and work on to settle debt with a larger amount.
Steps to settle debt using the Snowball technique
- List down all of your debts in a sequence starting from the lowest outstanding balance towards the highest outstanding balance.
- Also, list down the interest rate and monthly installment of each of the respective debts. You can contact the bank or financial institution that offered you the loan to check on your outstanding balance.
- Each of the debt also has a payment deadline every month. To ensure that you will no be penalized for late monthly payment, write down all of the payment deadlines for your debts to avoid late payment interest charges. This indirectly contributes to your debt increasing.
- On the debt list, choose the smallest amount of debt. As an example, debt with the smallest amount of monthly installment. Now focus on settling the smallest debt. If the monthly installment for the smallest debt is a credit card with payment of RM100, try to increase the payment to RM150 instead.
- At the same, do not forget to pay the monthly installment at least at the minimum amount for your other debts.
- After you successfully settle the smallest amount of debt (in this case a credit card) choose the second debt on your list. As an example, a personal loan with a monthly installment of RM300.
- Put aside RM150 that you used each month to pay the credit card and add that into your monthly repayment for the personal loan. Hence, each month you will pay RM450 (RM300 + RM150) for your personal loan.
- Repeat this strategy for all of the debts on your list.
Advantages & disadvantages of the Snowball technique
This technique give you the motivation on why you should continue to pay all your debts. You will also be smarter in managing debt and avoid yourself when going over the limit with your credit card.
That being said, this technique takes a longer time to settle all your debts. This is because the minimum payment made for all the other debts will cause an accumulation of interest that extends the repayment period of the other debt accounts.
Technique 2: Avalanche
What is the Avalanche technique?
To put it briefly, the avalanche technique is somewhat similar to the Snowball technique. The main difference is the sequence to settle the debt. In this technique, you will arrange the debts according to the interest rate (highest to lowest) and start paying the debt with the highest amount of interest first. As opposed to the Snowball technique where you focus on the smallest amount of debt, the Avalanche technique focuses on the debt with the highest interest rate.
Steps to settle debt using the Avalanche technique
- List down all your existing debt in a sequence starting from the highest interest rate.
To illustrate, you have these debts:
|Credit Card||Personal Loan *term of 2 years||Car Loan *term of 7 years||PTPTN *term of 6 years|
|Interest Rate (yearly)||18%||8%||3.51%||1.5%|
|Monthly Installment||RM150 (1st month)||RM241||RM667||RM435.96|
- The debt with the highest interest rate is the credit card with interest of 18%. So, based on the avalanche technique, you have to settle the credit card debt first.
- For example, the table above shows the debt amounting to RM1,493.96. To settle the credit card debt faster, you have to use all the extra money to pay the outstanding balance.
- You can use the same calculation as the Snowball technique. As an example, you have allocated a monthly payment of RM1,600 for all of your debts. You will use the extra RM106.04 (RM1,600 – RM1,493.96) to pay the debt with the highest interest rate. At the same time, you would need to to make minimum repayments for all of your other debt accounts.
- After you have settle the outstanding balance of the debt, you will need to make payments for the debt with the second highest interest next by using the extra money of RM256.04 (RM150 + RM106.04) and repeat the same repayment pattern for the the other existing debts.
Advantages & disadvantages of the Avalanche technique
The advantage of this Avalanche technique is that you can save by avoiding to pay double the interest because the debt with the highest interest rate will be settled first.
However, there are some debts that have high interest with high outstanding balance. The time taken to settle that kind of debt will take around 2-3 years. Here comes the psychological challenge. Are you able to keep yourself disciplined using this Avalanche technique? Therefore, this technique requires self-discipline and high commitment.
Technique 3: Snowflake
What is the Snowflake technique?
When compared to the Snowball & Avalanche technique, this technique is more flexible and does not require a high financial monthly commitment to settle debt. Due to this technique being more flexible, you do not need steps or specific calculation to pay back debt.
You can pay your debt at any time according to your capabilities. Although you make minimum payments for all of your debts every month, if you have extra income (side income, cashback, bonus etc) you can allocate some of the money to continue paying your debts. As an example, you can pay RM20 for the first week, RM50 for the second week, and carry on to the next.
Tips to settle debt using the Snowflake technique
- Record daily expenses
You have to be aware of your spending habits. This way, it will be easier for you to save more and be more careful in spending your money. You are able to see, which expenses are excessive and actually not important in your budget. You will be able to lessen your spending and balance left of from your spending can be put to use to pay off debts.
- Do a part time job
In this current era, there are many ways out there to gain side income. You do not need to go out from your and it requires zero budget. This is list of websites and apps to earn money online.
Advantages & disadvantages of the Snowflake technique
You will no be burdened with high financial commitment, because you only need to pay a little at a time with a small sum of money.
You will be able to settle debt without realizing if you have a part time job or be a freelancer.
That being said, this technique takes time and there is no guarantee of when you are able to settle all your debts. So, this method really needs a thorough planning.
You need to be updated on the debt balance to avoid hidden charges or accrued interest. This also to ensure that you will be able to predict the time taken to settle all your debts.
The 3 techniques above have their own advantages and disadvantages. However, the main target is one: TO SETTLE ALL DEBTS.
So, here are 2 techniques for those who wants to settle debts fast and at the same time save on monthly commitment with lower monthly installment.
Technique 4: Overlap
What is an Overlap?
Overlap accumulates various existing debts into one account (personal loan) that is new with the same financial institution. Overlap personal loan offers new financing with a lower interest rate or a longer tenure compared to the existing loan.
Overlap is only offered by the same financial institution. As an example, you have a personal loan and credit card (active loan) at Bank X. You can apply for Overlapping Facilities only at the same Bank.
Steps to settle debt using the Overlap technique
1. Overlap using Loan with Lower Interest Rate
2. Overlap using Loan with a Longer Tenure
3. Overlap If Deduction in Salary Slip Exceeds 60% (for civil servants)
Advantages & disadvantages of the Overlap technique
You are able to lessen your monthly commitment and receive cash in hand without adding to your existing debt. The debt burden will not lessen. Overlapping a personal loan is one of the techniques to lessen commitment but the debt is still there and will potentially increase if the borrower is not disciplined in paying back the debt.
Technique 5: Debt Consolidation
What is Debt Consolidation?
Debt consolidation is one way to gather all of your various debt into one new personal loan. The financier will unite all of your debt into one account (new personal loan) with a lower interest rate compared to the average interest rate of your existing debt.
To simplify, you will use the money from the new personal loan to settle your existing debt. Debt consolidation can be done at any financial institution that offers the service.
Steps to settle debt using the Debt Consolidation technique
- Take due diligence on yourself (list down your debts)
- Find a better interest rate
- Identify processing costs, fees & hidden charges
Advantages of the Debt Consolidation technique
- Focus on paying one installment only
- Help to lessen your monthly commitment
Disadvantages of Debt Consolidation
- Longer repayment period with lower interest rate
- Chances of application being rejected
- Will not eliminate debt
Which technique best suits you?
The person who knows you the best is yourself. Therefore, choose a suitable technique that suits your capabilities. These five techniques has their own advantages and disadvantages. There are techniques that can help to settle debt faster but requires discipline and high commitment, there are others which are too flexible. Each individual has different financial commitment. Hence, you have to know your goals and choose the right and effective technique that best suits you.
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