Smart Solutions for Managing Debt

Every loan has 2 components: a principal amount, which is the money you borrow, and the interest, which is the lender’s profit expressed as a percentage.

What happens when you miss a payment or don’t pay on time, is you not only incur late payment or penalty fees but you also have to pay for the interest charge on the interest payment that you missed, also known as compounded interest.

The best way to end debt is to pay it off completely. But in most situations where you owe 4 or 5 creditors, this may not be possible. Financial strategists have come up with various techniques such as the Snowball Method which is highly effective if you are disciplined about it.

Debt Snowball Method: Make a list of all your loans and order them from the highest balance to the lowest. Make minimum payments on all of them except for one, which you will put all your spare cash into. This frees up more cash for your next set of payments.

Continue making minimum payments on the rest while you put all your free cash on the same loan you reduced. Once you have paid it off, you move on to the next loan on your list and keep paying extra cash on it until it is gone.

Each time you pay off one loan, you’ll be able to apply more funds to the next one. It’s called the snowball method because the amount of money that you apply to each debt grows like rolling snowball picking up more snow.

The key here is to use the freed up cash to reduce another loan, not to add to your living expenses.

Debt consolidation: Sometimes it’s easier to deal with one big loan than several creditors at the same time. By consolidating or putting all your debts into one loan, you may be able to lower your overall interest rate, making it easier to repay your loan. The key is to make sure that your new loan has the same term as your old loans; otherwise, it will significantly increase your total interest costs.

If you’re overwhelmed by debt and don’t know how to resolve it, talk to a financial counsellor who can help you plot your payment strategy and negotiate with creditors.