You will be able to list your debts by cost and choose which to repay first.
Hafiz is 31 and owes money in three places. There is S$3,000 on his credit card that he has been rolling over since a holiday, S$6,000 left on a personal loan he took for a wedding, and S$18,000 on his car loan. After his payday transfers and his emergency fund, he has S$300 a month spare to put towards debt. The question he keeps asking is which one to attack first.
Most people answer by size, clearing the smallest balance for the satisfaction of crossing it off, or by noise, so whichever lender sends the most reminders gets paid. This lesson ranks debts by what they cost you, because that is the order that saves the most money.
Start with a list. For each debt, write three figures: the balance outstanding today, the interest rate, and the minimum monthly payment.
Your card statement shows all three for each card. Loan statements and the lender's app show the balance and the instalment, and the loan contract shows the rate. For personal and car loans, look for the effective interest rate: the yearly cost of the loan once the way you repay it is taken into account. Lenders often advertise a lower flat rate, which is worked out on the original amount for the whole term even though you are paying the balance down, so it understates the real cost. Compare loans on the effective rate. If you cannot find it, ask the lender.
Include the debts people tend to leave off: instalment plans on a card, buy now, pay later balances, and money owed to family. A family loan usually has a rate of zero, and its minimum payment is whatever you agreed.
A card that you pay in full by the due date every month is not on this list as a costly debt. You owe the balance for a few weeks, but no interest is charged. The one that costs money is a balance you carry from month to month.
Here is Hafiz's list. The rates are made up for the example, and his own statements show his real ones.
Credit card: S$3,000 at 25% a year, minimum payment S$90. Personal loan: S$6,000 at 9% a year effective, instalment S$280. Car loan: S$18,000 at 5% a year effective, instalment S$520.
Put the list in order of interest rate, highest at the top. For most people the order looks like Hafiz's. Card balances and personal loans sit at the top, because the lender has nothing to take back if you stop paying and charges for that risk. A home loan, secured on the property, and a study loan usually sit near the bottom.
Then follow one rule. Pay the minimum on every debt, every month, so nothing falls into arrears or picks up late fees. Put every extra dollar on the debt at the top. When it is cleared, add its whole payment to the next one down.
Hafiz pays S$90 plus his spare S$300 on the card, which is S$390 a month. At the example rate, the balance is gone with the ninth payment, and the interest along the way comes to about S$305. Then the S$390 moves to the personal loan, whose payment becomes S$280 plus S$390, which is S$670 a month. The car loan, the cheapest, carries on at its normal instalment.
There is a second reason to clear a card balance quickly. With many cards, once you carry a balance, new purchases start costing interest from the day you make them, with no interest-free period. Your card's terms say whether yours works this way, and until the balance is gone, Hafiz pays for daily spending from his debit card instead.
Here is the way to think about any spare dollar while you still have expensive debt. Paying off a debt at a given rate is the same as earning that rate, with no risk at all.
Every S$1,000 Hafiz takes off his card saves him about S$250 a year in interest at the example rate. To do as well with that S$1,000 invested, he would need a return of 25% a year after fees, year after year. Few investments promise anything close, and none can guarantee it. The repayment is certain.
The same sum against his car loan saves about S$50 a year. That comparison is much closer, and it is why low-rate debts such as a car loan or home loan do not have to be cleared before you invest. Lessons 6.2 to 6.4 show where investing fits once the expensive debts are handled.
For some people the list is short. Darren, from the earlier lessons, has only his study loan, paid at S$250 a month by GIRO, and his card has been paid in full automatically since lesson 2.4. He has nothing expensive to clear, so he keeps paying the study loan on schedule and moves on.
Ranking by rate is sometimes called the avalanche method. Its main rival, clearing the smallest balance first for the motivation, costs more in interest but suits some people better. Those methods, along with balance transfers, debt consolidation plans and how to talk to a lender when you cannot pay, are taught in Money Foundations: budget, debt, buffer, and in Credit and debt: scores, cards, loans and BNPL.
For this course you need only the list and the order. Gather your statements and loan apps, because every debt you owe is about to go on one page, with its rate beside it.
List all your debts by interest rate and mark which one you will pay down first.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).