5 Smart Ways to Get Out of Debt
Living in Singapore can be expensive, and it isn’t always easy to cut back on credit card use and loans. Unfortunately, debt is a growing problem and finding effective ways to reduce debt requires a little knowledge and know-how regarding the various options available to you.
You may have heard about one or two strategies to reduce debt, such as balance transfer, the debt snowball method or debt consolidation loans – but which of these is best if you want to pay off your debt faster? Let’s take a look at Moneylender Review’s top methods on how to reduce debts.
Debt Reduction Strategies We Don’t Recommend
Getting out of debt isn’t easy, especially as some of the debt management options available in Singapore right now come loaded with high interest and expensive monthly payments, which could ultimately have the opposite effect of helping you get out of debt faster.
Depending on your budget, debt balance and ability to make monthly payments, some of the solutions below may help you – but we’d still steer clear of these in favour of better options that will help you eliminate your debt faster and more efficiently. Keep reading and all the best information will be revealed.
1. Debt settlement
If you find yourself facing a sudden loss of income due to job loss and you know that a garage sale or bank overdraft just isn’t going to deliver the funds you need to meet your debt and interest payments in the medium-term, you might be tempted to try and ease the pressure by using a debt settlement appeal.
This method involves writing an appeal letter to your creditors (i.e. the bank, money lender or other financial institution you owe money to) to explain your financial situation and request a better debt repayment plan with lower minimum payments and interest payments.
However, under these circumstances it’s very rare that a lower monthly payment package is actually agreed, and many Singaporeans see such appeals rejected. What’s more, if your appeal is approved, your bank or money lender is only likely to let you pay the lower monthly payment rate for a very short time.
In some cases, the bank or lender might also ask for a lump sum to be paid by a certain date – which could add even more financial pressure to your debt situation and struggles with keeping up with payments. In any case, debt settlement is rarely the best way to get rid of your debts.
2. Home equity loans or Home Equity Line of Credit (HELOC)
One way to pay off your debt is to consider a home equity loan, which has low interest rates but effectively “cashes out” your private property, or a Home Equity Line of Credit (HELOC), which is an unsecured loan that often comes with about the highest interest rate you can get on the market.
The first option is very risky, as it will see your property ownership held as collateral for the loan. The second, meanwhile, could be counter-productive if your ultimate goal is getting out of debt, due to the highest interest rate issue.
3. Cash out a life insurance policy
Recent research shows that Singaporeans are today buying more life insurance policies than ever before. So, if you have one, there has got to be some money involved in cashing it out, right?
At the time of writing, people in Singapore can sell their insurance policy to a third party, who will then take over their monthly payment obligations, or any other money to pay that remains. The former policy holder will also get paid an upfront payment which will usually be of a higher value than if the policy was surrendered.
This is a relatively fast process which could help you pay off your debt – but there are some serious shortfalls. First up, you’ll lose any insurance coverage previously afforded to you. Secondly, the third party you sold to may benefit from your financial situation upon your death. And finally, the sale of insurance policies is not regulated by the Monetary Authority of Singapore (MAS).
4. Withdrawing from a retirement fund
It’s not uncommon to take out a little money from your Central Provident Fund (CPF) or retirement fund to help you through those difficult times. However, while doing so could seem like a sensible debt management idea in the short-term, it may prove detrimental to your financial situation in the future, when you come to retire..
In the CPF Board’s case, warnings have already been issued to CPF members against prematurely withdrawing money that is intended for long-term retirement needs, after withdrawals recently shot up due to the COVID-19 crisis.
But no matter where your retirement funds are stored, if you want to reduce debt faster, it probably makes more sense to take out a low interest rate loan to pay off debt in the short-term than to jeopardize your future by withdrawing your hard-earned savings before they’ve properly matured.
How to Pay Off Debt the Smart Way
If you owe money and want to pay back what you owe in the best way possible for your investments, credit score and financial situation, it’s important to review the various strategies available to you very closely.
While taking out additional credit cards or cashing out life insurance policies or retirement savings can be counter-productive when trying to reduce your debt burden, there are plenty of other options available which may help you to become debt free in a quicker and more efficient way. Let’s share some information on these to help you make better financial decisions.
1. Live on a budget
If you find yourself beginning to struggle with student loan debt or debt repayment of any kind, the first step you should consider is to cut back on unnecessary costs and try living on a budget. Taking simple steps, for example, “step 1 – eat at home instead of eating out” or “step 2 – have a garage sale” can help you to save some extra money to put toward the payment of your debts.
Using money-saving apps and Google Docs to keep track of your budget can help you set aside some cash to pay off those car loans or that credit card balance each month in a simple, stress-free way. You could even use some of the money to set up an emergency fund to help aid you in the future if ever you encounter any further debt complications later down the line.
This might not help you take control of your debts and finances from day one, but it’s certainly a drawback-free strategy to help you on the road to repaying the money you owe without causing too much hardship for your family or financial situation. It’ll keep your bank, creditors and credit card issuers happy and help you to slowly reduce debt over time.
2. Pay at least the minimum on each debt
If your payback responsibilities aren’t 100% urgent, paying just the minimum payment amount on each of your debts month-on-month is another great way to slowly reduce debt over time in a way that shouldn’t cause too many problems. You could take on an extra part time job to raise some additional money or cut back on impulse purchases and days out with the family, which may help you curb unnecessary or problematic spending. You could also use the balance transfer feature available with many credit cards.
US money management expert and savings guru Dave Ramsey refers to this technique as the “debt snowball method” – and consistently claims this is the best way for most people to quickly clear their debts.
The idea behind the debt snowball method is that making a minimum payment on each debt every month will help your debt payments slowly build up over time “like a snowball”, getting bigger and bigger until you are in full control of your payments – or even 100% debt free. The best strategy is to focus on the debt with the highest overall balance or most urgent obligations first.
Unlike many other strategies, this method will also help you build up a good credit score by keeping up with debt repayment and credit card debt payments in good time – which, in turn, will stop your debts and interest from spiralling out of control in the longer-term, too.
3. Ask your creditor for a lower interest rate
While trying to reduce debt by tying yourself into paying a hefty lump sum by a pre-agreed date could cause unnecessary stress, there’s never any harm in politely asking your bank, lender or creditor for a lower interest rate. If you never ask the question, you’ll never know whether this option may help – so why not give it a try?
Assuming you have a good history of making payments on time, there’s always a chance that credit card issuers, banks or money lenders will be willing to offer you lower interest charges for a short or temporary time period.
After all, they will usually want to keep your business. If you can successfully negotiate a lower rate without having to pay a lump sum or be hit with drastically higher interest payments later down the line, this may help you better manage your debts in the short-term and give you a bit of much-needed breathing space. You can also continue to build up good credit by making timely payments to your credit card company or bank.
4. Consolidate your debt
Another tried and tested way people can get out of debt or pay off debt faster is to consolidate all of their separate debts into one manageable, individual monthly payment using a consolidation loan.
If you’re able to find the right deal using a loan comparison site like Moneylender Review, this can help you to reduce your interest charges by piling all your debts together into one lower interest rate loan. Now, you could consider a home equity loan or line of credit, but as we mentioned earlier, these options aren’t without their pitfalls. In many cases, your best bet will be to approach money lenders who offer faster approval processes than banks, as well as competitive interest rates.
Compare the best loan offers and avoid the highest interest rate deals using Moneylender Review today.
5. Go through credit counselling
Let’s face it – understanding finance is very rarely straightforward, so speaking to a financial advisor or credit counsellor could be the best way to get a clear picture of your financial situation and better assess the options that are available to you.
A professional credit counsellor may be able to help you better balance what you owe and pay off your debt in a strategic way you hadn’t even considered before. As such experts have all the right information and expertise at hand, they’re often in the best possible position to help you to work through your debt problems, develop a sensible plan and pursue a debt free life in the longer-term.
Compare Cost-saving Loans With Moneylender Review Today
If you’re looking to reduce debt in the best possible way, improve your credit rating, secure lower interest charges and avoid cashing out your investments, Moneylender Review can help you consolidate your debts with the perfect personal loan to meet your needs.
Compare the best loan options and lower interest rate deals today, by using Moneylender Review’s tried and tested loan comparison service. We’ll help you find an amazing loan that will aid you in paying off your debts once and for all.
