How to Prioritise Which Loans to Pay First
While it is a well-known fact that debt should be something to avoid at all costs, did you know that we are actually “borrowing” every time we swipe or tap our credit cards?
In addition, in Singapore, it’s near to impossible to buy a house or a car in cash, unless you’re super rich.
One thing to keep in mind is that while pesky, incurring debt is not something to be ashamed of. While all debt needs to be paid off at one point or another, the important thing is to prioritise paying off bad debt over good debt.
As such, we at Double Ace Associates are here to educate on how to look at all your loans through a bird’s eye view and figure out which loans to pay off first,
Good Debt vs Bad Debt
A general rule of thumb is to pay off those debts from the highest interest rate to the lowest. In order to this, we first have to understand what is good debt vs bad debt.
Good debt often creates opportunities that would more than repay itself. Examples of good debts are home loans, business loans and debt consolidation plans.
On the other hand, bad debt never amounts to more than a liability. This includes using your credit card to buy a luxury handbag that isn’t within your financial means and taking a car loan to buy an expensive car only to impress.
Debt to friends and family
As debt to friends and family are usually of zero financial interest, it is the most common loan people make when they end up strapped for cash.
If it’s a one-time thing and you manage to repay on time, it might be acceptable. However, you may end up damaging your precious relationships with family if you don’t pay it back promptly.
In addition, if you lack the tact to be more thrifty now that you owe your friends and family money, you are going to be infamous as a spendthrift. This includes getting caught living it up, going on overseas holidays or enjoying shopping sprees when you still owe your loved ones money.
As a desperate measure, it is understandable that you would turn to the closest people around you for help. However, if your friends and family have made the tough decision to loan you a sum of money, we advise you to make a sincere effort to pay back the money as soon as you can.
Don’t take your time repaying this debt as it could make the people close to you feel as if they are taken for granted. Note that money is difficult to come by for you as well as others.
Home loans in Singapore (~1.2% to 2.6%)
Home loans are an unavoidable form of debt as everyone needs a home to live in.
While you can’t avoid taking on home loans, you can still be smart about it by comparing between different loan plans in order to take out the best home loan in Singapore. Understand the difference between home loan packages and refinance periodically in order to keep your interest rates low.
Business loans in Singapore (2.55% to 11%)
If you own a business, you must need working capital. This could be funding for office space, staff, marketing and more. In this aspect, one of the worst things you can do aw a business owner is to tap into your own finances, and pay for all of the working capital upfront.
Instead, clever use of loans can ensure that even if the business fails, you’ll be paying a manageable amount every month. However, if you empty your bank account, you’ll be living on credit for months after the business fails, making the recovery process twice as hard.
Personal loans in Singapore (3.4% to 5.43%)
While personal loans are preferable to credit card debt, they are still relatively expensive loans to take out. As such, we advise you to never take out a personal loan for optional or leisure spending.
Credit card debt (25% to 30%)
Alas, credit card debt remains as one of the most expensive kinds of debt you can get into, second only to loans from illegal loan sharks.
The reason why credit card debt is so dangerous is because it spiral out of control very easily. This is because you are being charged interest not just on the money you’ve used but also on the interest itself. As such, even with a stable income every month, your debt can easily spiral out of control.
As such, we strongly advise you to never turn to credit card debt for unnecessary spending like shopping or entertainment-related activities. Even for essentials, find other ways to pay for them if possible.