(This article was originally published on the 27th of February 2018 and updated on the 8th of January 2021).
A critical component of personal finance is avoiding debt build up. It is worth noting the current trend in bankruptcy cases in Malaysia, where one of the major causes of bankruptcy has been attributed to personal loans. Another potential cause for financial liabilities to grow in alarming proportions is the unrestrained use of credit cards.
If you are a responsible borrower, debt repayment is of paramount importance, which should be treated with careful planning and urgency. There has to be a conscious effort to weigh up your ability to repay every time a credit expense is made, and a clear strategy to tackle your repayments monthly should also be made. Another plus point is to have a target to be financially free, with a careful plan to be taken to achieve this.
Take Immediate Action
If you notice that the amount of debt you have is starting to pile up and beginning to feel like a burden, it is good to immediately take action to tackle them before it gets too late.
Of course, your debt will not simply go away. Some might choose to engage the services of professional counsellors or the ‘debt-relief’ experts. However, this might entail additional costs that might be unnecessary, especially when free debt management resources are increasingly available.
The best way to contain the situation is to fix your financial dilemma step-by-step. With some smart planning and determined approach, your monthly debt commitment can be reduced, which will in turn take some burden off your mind.
How to Reduce your Monthly Debt Commitment?
The hardest part of any debt reduction goal is knowing where to start. It is imperative to set a timeline for clearing off your debt that is manageable by yourself, while at the same time is effective in preventing worse financial repercussions to you (e.g. prolonging loan tenure that will cause you to pay more interest). If you are firm on resolving the matter, follow these steps that can help you to bring down your outstanding balances to manageable levels.
1. Assess Financial Obligations
A good starting point is to accurately and honestly evaluate your current debt situation, i.e., perform due diligence on yourself. When you know the exact amount, type of debt, payment schedules, as well as your own financial habits, it would help you to plan out better.
List down all of your debt with their respective repayment amount, interest rates and payment schedules. Next, take a look at your own monthly income and how much you can allocate monthly to strategically repay your debt, without badly compromising your allocation for necessities. This is important as you will need to decide on your preferred method in settling all of your debts. Choose what is best for your own financial situation. After all, the most important part is determination and consistency.
2. Align Budget with Debt Commitment
After you have assessed your financial obligations, review your monthly budget. Do some financial exercise and list down all of your regular and recurring expenses. Do not leave out any expense that would have a material effect on your monthly budget.
Once you have deducted all of the expenses, the leftover cash will be the amount you can afford to pay your monthly debt commitments. You can increase your disposable income by revisiting your expense list.
Look for the non-essentials like internet subscriptions or spending that can be cut down. Reduce your monthly spending on these items in order to increase your disposable income available for other more important causes, such as food and household expenses. It will put you in a better financial position as you begin a determined effort to improve your debt situation.
3. Craft a Debt Reduction Plan
When everything is arranged, you can craft a workable debt reduction plan. Earmark your available monthly cash on hand for those debts that hurt the most. It means you prioritise paying the loan with the highest interest rate and highest outstanding balance.
The plan will be a continuing cycle every month. Your objective is to significantly reduce the debt balance, if not fully liquidate them. Repeat the process of ranking the debts according to the highest rate and outstanding balance.
If the greater part of your debt is credit card payables, securing a personal loan that charges lower rates can be a strategy in your debt reduction plan. This option can lessen interest expense and further reduce your debt balance.
As you are implementing the debt reduction plan, you are also tempering your spending. In particular, you need to put a stop on your credit card usage. Accumulating more charges will only set you back and wreck your debt reduction strategy.
4. Negotiate with your Creditors
Another approach is to negotiate with your creditors. Instead of turning your back and evading their collection follow ups, face up to them. Negotiating with the banks or credit card companies is not a sign of surrender. Informing them of your predicament reflects your willingness to pay.
There is more to gain in case your creditors agree to a reduced settlement or debt restructuring scheme. A payment extension might be granted too. Also, if there is a window to move your credit card debt to a new one with lower interest rates, do it.
As mentioned earlier, obtaining a low interest rate personal loan through debt consolidation can be a solution to pay off your debts. Many who have taken this option have been able to ‘reset’ their financial positions and reduce their monthly debt commitments. Consult with a personal loan provider to find out how they can help to lighten your financial cargo.
5. Execute your Debt Plan Diligently
The success of your debt reduction plan rides on your shoulders. Choosing to take action to reverse a perhaps poor financial habit is already commendable, and if you manage to stick to it, it is something you should really be proud of.
As such, executing your plan consistently without fail, is a surefire way to achieve your financial goal. Start implementing your debt plan little by little and you will eventually see its effect on your own wellbeing.
You Are In Control of Your Debt, Not The Other Way Around
A debt problem can be very taxing on the mind, but it does not mean that you have to deal with it on your own. As we mentioned, you can speak to your credit provider to renegotiate your loans (they are also willing to speak to you!), or you can also seek free professional advice. With trust and discipline, you can pull off your personally crafted debt reduction plan. Once you have succeeded, learn from the past and aspire to commit to more disciplined financial habits. Remember, a debt-free situation is far better than being debt-ridden.
If you have decided to use a personal loan to pay off your credit card debt or other loan commitments, but you don’t know which personal loan best fits you; check out Direct Lending – an online personal lending platform. Our smart eligibility checker will provide you with the best recommendations for bank and koperasi personal loans instantly. We can assist you to search, compare and apply for the lowest interest rate personal loan. Receive funds as fast as 2 working days. As always, our service is 100% free, with no upfront payment or processing fees.