Disclaimer: This article provides knowledge to readers which does not provide any advices to readers. The writer and the company of this article take no legal responsibilities for any usage of these methods. The readers should consult their financial adviser first before implementing any debt reductions.

Debts or loans, in layman term, means borrowing money from someone who has disposable money. As some items are out-of-reach by our income, these items require debts to assist us to buy them.

Nowadays, as economy moves faster and more advanced, financial institutions are more creative in designing their products to improve their profit, such as

• Unsecured borrowing and debt (personal loans and credit cards)

• Buy-now-pay-later scheme (BNPL)

Be mindful when these products are offered! As some of the products do not perform credit checks, they may bring financial woes to you.

If you are currently in these scheme and struggling, keep calm and read the next few methods.

1. Understand your loan operation, terms and condition

As a lot of financial products are bought virtually, debt's terms and conditions may not viewed before obtaining. The financial institution will mail you a copy of terms and conditions / loan agreement / product disclosure sheet. You may check your mail for these documents. It is important to read it once when you are doing your financial review.

If you are not a good reader, find and mark down the information below.

• Loan principal (total amount of your debt)

• Loan tenure (length of time for you to pay your debt)

• Cost of loan charged (amount of interest charged to your debt)

• Any other special clauses (such as penalties imposed if you pay them early)

This information may affect the way you reduce the loan amount. If all these fail, you may end up pay more than what you should.

2. Understand cost of debt / interest rate of your loan

The amount of interest charged is the additional amount you need to pay for the loan. It contributes to higher amount when the interest charged is higher.

Besides having high and low interest rates, there is another term to take note, which are

• simple interest rate loan

• compound interest rate loan

Simple interest rate loans charges its interest based on the loan principal. This means that the interest WILL NOT reduce even you have paid much to reduce the outstanding loan amount. Unless you are clearing off your loan, you do not save much on interest. The example of loan using this method is vehicle loan.

Other types of loans, however, uses compound interest rate method to charge interest. Compound interest rate loans charges its interest based on the outstanding loan amount. This means that interest will be charged based on the current outstanding loan. This seems well but as most of the loans are using this loan-charging method, the higher the loan outstanding, the higher the interest charged. This method applies in housing loan, personal loan and credit card outstanding amount.

3. Check your cash flow statement

Cash flow statement is a financial tool to check your financial ability. Unlike cash flow statements for the company, individual cash flow statement relies on two components.

• Cash inflow

• Cash outflow

Cash inflow includes your salary, income, royalties and bonuses. In a simple term, it means cash flows into your pocket.

Cash outflow, however, includes your expenses, regardless of whether the amount is fixed or changed per month. Layman-term wise, this means cash flows out of your pocket.

A personal financial planner will access your ability based on an equation of

Net cash flow = Cash inflow - Cash outflow

If you do not save an amount every month, the net cash flow is considered healthy when it is positive and more than 10% of your monthly income. If you are earning $3,000 per month, you should have a net cash flow of at least $300 per month. The cash outflow should include any repayments you have made for your loans.

In another words, you should check this yourself by putting all the numbers in. You are advised to check the net cash flow before making a decision to take up loans or commitments to prevent from falling into debt woes.

4. Plan a strategy to reduce loan amount

There are numerous strategies in reducing the loan amount. Recommended long-term strategies are

• Short- to long-term loan strategy

• This strategy is for people who have multiple loans at the same time. They will clear the loan with the shortest term first.

• High interest to low interest loan strategy

• This strategy is for people who have multiple loans with different interest rate at the same time. They will clear the loan with the highest interest rate first, even if the outstanding amount is lower than other loans.

You may consult your financial adviser on the best methods of reducing your financial woes as not all common strategies are useful for everyone.

5. Perform principal reduction whenever your budget allows

Performing principal reduction on your loan means reducing the outstanding loan amount through additional repayment on the same term. In other words, if the loan repayment is slated as $200 per month, the repayment is made $400 per month, or any amount more than the stated amount, to reduce the outstanding loan amount.

Take note when performing this action.

• Read the terms and conditions clearly. Some of the loans imposes penalty for early repayments and clearance. If this is so, it is better to reduce the balance of other loans.

• Do it at the correct timing. Doing this during high interest rate period reduces your future interest rate drastically. 

Do not sacrifice other needs while doing so. Sacrificing other needs to pay loan may end up taking additional loans with higher interest.

Understand loan reduction technically helps!

Loans are something that you get easily but struggle thereafter.

• Do you know that inconsistent loan repayments can affect your credit rating (CCRIS or CTOS)?

• Do you know that you can get great savings when you clear the loan at the right time?

• Do you know that you still need to clear your debts even after your death?

Join the course "Plan For Your Debt" by Minda Sfera Sdn Bhd if you are interested in learning technical aspects on debts. You will get the course now

• at RM220 only before 31 Dec 2024 (usual price at RM260)

• through HRD Corp Claimable Course scheme (contact us for more details)

• in Kahoot! courses

REGISTER OR CONTACT US NOW! Contact us for more details.