Many people, under the continuous pressures of life, find themselves obtaining multiple loans to cover various living expenses. Whether it’s for school and university fees for their children, purchasing a residential apartment, a car, or simply to cover the day-to-day costs amidst rising prices and inflation year after year, the moment the monthly salary arrives, it seems to dissipate quickly in repayment of loans and various debts.
Paying off these debts can take years, during which one may have to live with the bare minimum necessities of life, under the pressure of need and poverty.
The question that arises is how to smartly manage these loans to alleviate their burden?
In this report, Al Jazeera Net presents six smart ways to manage your loans efficiently, based on information from specialized websites and platforms such as Forbes, Money Tap, Economic Times, and others.
“The first step to solving your financial problems is to know your loans and debts correctly.” (Getty)
Know Your Loans
The first and most important step is to correctly know your loans and debts. Contrary to what one might expect, many people who are drowning in debt and taking out one loan after another do not know the exact details of their debt obligations, interest rates, installments, repayment dates, and additional fees for late payments, among other necessary details.
Remember that awareness solves half the problem. Here, it is recommended to document the details of all your outstanding loans in a special Excel file, for example, and list the amount of each loan, its interest rate, the required monthly installment, how much you have paid, how much is left, and when it will be fully paid off.
This will help you to know which loans cost you the most and which are smaller and less costly, giving you a thorough idea about your debts and how to manage them. This leads us to how to pay off these debts after getting to know and understand them in detail.
Snowball Debt Repayment Method
This is a good method for dealing with multiple loans. Let’s assume, for example, that you have a personal loan from the bank, another loan for buying a car, and a third for a residential apartment. You should first focus on accelerating the payment of one of these three debts while remaining committed to the monthly installment for the other debts.
There are two ways to do this:
The First Method: Pay Off the Smallest Loan
This method requires you to pay the minimum amount on all your debts except for the smallest one, which you should aim to pay off as quickly as possible by ‘bulking up’ the payments towards the smallest debt. Once it’s repaid, you move on to the next smallest debt while continuing to pay the minimum on the others.
The Second Method: Pay Off the Most Costly and Highest Interest Loan
This approach focuses on repaying the most expensive debt with the highest interest, while continuing to pay the minimum on your other loans. Focusing on paying off the costliest loan can free you from it quickly and save a significant amount in what would otherwise be high-interest payments, easing the burden of remaining debts.
Contrary to expectations, many people who are drowning in debt and taking loans successively don’t know the precise obligations of their debts, their interests, installments, repayment dates, and additional fees for late payments (Shutterstock).
Consolidate Your Debts
This method is an effective strategy to reduce the load of loans and numerous monthly installments that are due with each paycheck. Suppose you have three loans from three different entities—whether banks or private or government lending institutions—requiring you to pay three separate monthly installments that consume your salary and income.
It’s advised to consolidate these loans by taking out a personal loan or a “debt consolidation loan” to pay off all your current high-interest loans and instead have just one loan to manage with a single monthly payment.
Not only does debt consolidation save you the hassle of paying multiple payments and installments, but it can also reduce the total interest you pay, allowing you to repay the loan faster and at a lower interest rate.
If your salary doesn’t permit you to take out a large personal loan to pay off all your debts, you might consider taking out such a loan through a mortgage or by offering security that you own, as many banks and institutions offer these loans at lower interests. Thus, you’ll only need to track and manage a single monthly installment at a uniform interest rate.
Allocate Unexpected Gains to Debt Repayment
By unexpected gains, we mean any sum of money you earn beyond your usual monthly income and salary, such as a special bonus from work, year-end incentives, an inheritance, proceeds from a personal investment, winnings from a contest, etc.
Here, you must resist the temptation to spend on various forms of entertainment or purchase luxury items you don’t truly need. When in debt, it’s wise to focus all your efforts on getting rid of it, using these funds to reduce the weight of your debts.
“One of the simplest ways to manage loans is to increase monthly installments every time your income increases.” (Getty)
Increase Monthly Installments with Every Raise in Salary or Income
One of the simplest ways to manage loans is to increase the monthly installments every time your income increases. When your income goes up, rather than squandering the additional amount, opt to raise the installment you pay towards loan repayment. By boosting these payments every time you receive a raise, you’re shortening the time frame needed to pay off your loans and can also save money on interest.
Certificate of Debt Release
Lastly, when you’ve finished paying off a loan, make sure you receive a “certificate of debt release” that attests you have settled the loan and have no other outstanding obligations to the bank you’re dealing with. This certificate is crucial as it proves the loan has been fully repaid. Remember to also reclaim any pledged collateral, such as mortgages on the property or vehicles.
