Debt has always been a controversial issue. On one hand, having debt is a sign of financial difficulty and a huge risk. However, on the other hand, when planned for, a personal loan in Singapore can be seen as a tool that helps you capitalise on opportunities. Part of this plan would naturally include the planned method for paying off the outstanding debt on time.

Value Adding to your Knowledge on Debt Repayment

For the layman, the act of repaying debt might not warrant much consideration. For instance, you may not have thought extensively on methods to pay back your debt. Instead, you pay off your debts as requested to the best of your ability. This would be an inefficient use of your resources and could stack the odds against you.

The Value of this Article

To help bridge this gap in knowledge, we have crafted this article specially for you. In it, we will be covering the importance of timely debt repayments and the two primary methods – Stacking versus Snowballing.

Common to both of these methods is the assumption that you have limited ability to make repayments and need to efficiently spend each dollar. As such, while they do not immediately solve your financial woes, they do set you up for a foreseeable full repayment in the near future.

Stacking Method

In essence, the stacking method involves you prioritising the debts which have the highest interest rates. By doing so, you would be paying the least amount in interest during the lifespan of your debts.

How you can use the Stacking Method

To start, you will need to list down all existing debts before sorting them from those with the highest interest to those with the lowest. Do note that the focus here is placed on the interest entailed by each debt rather than the principal sum or the current amount owed.

Once the list has been prepared, you would need to also add on the minimum repayment sums per period for each loan. You can think of the totality of this minimum repayments as a fixed expenditure per each time period.

By subtracting the fixed cost from your income, you would find the remainder that can go towards clearing your debt. The priority here is given to the highest interest loans, thus allowing you to finish paying them off first. With the highest loans paid off, you would be incurring lesser increment interest based debt.

An Example of the Stacking Method

Here is an example of the stacking debt repayment method. In it, here are your existing debt obligations:

• House loan – $5,000 principal, 7% interest rate
• Car loan – $4,000 principal, 8% interest rate
• Credit card – $2,500 principal, 13% interest rate
• Student loan – $2,000 principal, 5% interest rate

Based on these debts, you would look to finish paying off your credit card followed by the car loan, house loan and student loan respectively. This is because your credit card has the highest interest rate. As such, you would finish repaying your student loan last.

Snowball Method

In contrast, the snowball method focuses on not on your debt’s interest rates but rather the principal amounts owed. This has the primary objective of clearing the number of debts owed in order to prevent a snowball or avalanche effect of debt.

How you can use the Snowball Method

For starters, you would again list down all of your existing debts. However, this time you would instead sort them from those with the highest principal to the lowest. The focus here is placed on the principal sum from each debt.

Similar to the stacking method, you will also need to add the minimum repayment sums per period for each debt on your list. Again, these minimum repayment amounts form a fixed expenditure of sorts.

Now, the effort to repay your debts will be centred around removing the number of debts from your list as fast as possible. In order to accomplish this, you would look to make the most payments for the debts with the lowest principals.

By clearing the number of debts you owe, you would be preventing your debt from going out of control. It also gives you a psychological boost as you quickly see debts being crossed off from your list.

An Example of the Snowball Method

Here is an example of the snowball debt repayment method. Reusing the same debt obligations:

• House loan – $5,000 principal, 7% interest rate
• Car loan – $4,000 principal, 8% interest rate
• Credit card – $2,500 principal, 13% interest rate
• Student loan – $2,000 principal, 5% interest rate

In contrast to the stacking method, you would now instead look to first pay off your student loan first, followed by your credit card, car loan and house loan in that order. This is due to the student loan having the lowest principal while your housing loan has the highest.

The Consequence of Failing to Repay on Time

There are two significant consequences for failing to repay your debt obligations on time.

Your Debt Spirals out of Control

When you fail to make timely repayments for your debts, the interest owed to each account increases incrementally. Over time, the amount you owe to debtors keeps on increasing till the cost of debt makes it impossible to repay fully under normal circumstances.

Poor Credit Rating Implications

When you are unable to make timely debt obligation repayments, your credit score will be negatively affected. Your credit rating is used as the basis for determining your credit worthiness and thus both eligibility for future loans as well as the interest rates attached. At all times, you should be looking to protect your credit rating by making timely repayments.

Enquire For a Loan From JD Credit

Here at JD Credit Pte Ltd, we strive to achieve each and every one of our customers’ needs and wants. We are a moneylender Singapore organisation that provides loans with the best rates to any individual that is approved by the IPTO (Registry of Moneylenders). Our team of well trained and experienced staffs are obliged and dedicated to help our customers with their financial matters.

Our vision is to achieve excellence when serving customers provide the best information and finest service for our customers and lead in the money lending industry.