As of 2023, Malaysia’s household debt is valued at RM1.48 trillion – an amount that is more than our federal government debts. That’s almost one in three Malaysians, according to the BNM Financial Capability and Inclusion Side survey (FCI 2021).
So, if you have debt, you’re not alone and with the right strategies, it's possible to overcome it. In this article, we’re going to explore the three most effective methods to pay off your debts, helping you regain financial freedom.
#1 Avalanche Debt Repayment Method
The Avalanche Debt Repayment Method is a debt reduction method that involves paying off debts with the highest interest rates first while making minimum payments on the rest of the debts.
The idea behind this method is to save money on interest charges in the long run and pay off your debts faster, provided that your current financial situation permits it.
How you can do this:
List all of your debts
Start by making a list of all your debts, including the outstanding balance, interest rate, and minimum monthly payment.
For example,
Credit Card A: RM1,000 balance, 18% interest, RM50 minimum payment
Personal Loan B: RM5,000 balance, 10% interest, RM100 minimum payment
Car Loan C: RM10,000 balance, 4% interest, RM200 minimum payment
Order debts by highest interest rate
Once you have listed all your debts, order them by interest rate, from highest to lowest. This is the order in which you will prioritize paying them off.
Using the same example, you would order it like this:
Credit Card A: 18% interest
Personal Loan B: 10% interest
Car Loan C: 4% interest
Make minimum payments on all debts
While focusing on paying off your high-interest debt, make sure to continue making the minimum payments on all your debts to avoid late fees and negative marks on your credit report.
Using the same example, you would still make the minimum payments like this:
Credit Card A: RM50
Personal Loan B: RM100
Car Loan C: RM200
Pay extra towards your highest-interest debt
Allocate as much extra money as possible towards your highest-interest debt. This strategy will allow you to pay off your high-interest debt faster, reducing the amount of interest you pay over time.
It will look something like this:
Credit Card A: RM50 + RM300 (extra payment)
Personal Loan B: RM100
Car Loan C: RM200
Repeat the process
Once you've paid off your highest-interest debt, move on to the next highest-interest debt and continue paying extra towards it while making minimum payments on the others. Repeat this process until all of your debts are paid off.
#2 Debt Snowball Method
Although the Avalanche Debt Repayment Method is a smart approach to paying off debt, it may not be suitable for everyone, as individual financial situations vary. If you find it difficult to make minimum payments on all your debts, an alternative strategy called the Debt Snowball Method might be more helpful.
The Debt Snowball Method involves paying off debts in a specific order, starting with the smallest balance first. This can provide a sense of accomplishment and motivation as you see your smaller debts disappearing one by one in a systematic approach.
However, one thing to note is that the Debt Snowball Method may not be the most cost-effective strategy in terms of overall interest paid, as you may end up paying more in interest than if you paid off debts with higher interest rates first.
How you can do this:
List all of your debts
Make a comprehensive list of all your debts, including credit cards, loans, and other outstanding balances. Note down the total amount owed, the minimum monthly payment, and the interest rate for each debt.
For example,
Credit Card A:
RM1,000 balance, 18% interest, RM50 minimum payment
Personal Loan B:
RM5,000 balance, 10% interest, RM100 minimum payment
Car Loan C:
RM10,000 balance, 4% interest, RM200 minimum payment
Order debts by smallest balance
Arrange your debts in ascending order based on their outstanding balances, from smallest to largest. Ignore the interest rates for now.
Using the same example, you’ll want to arrange it like this:
Credit Card A: RM1,000
Personal Loan B: RM5,000
Car Loan C: RM10,000
Make minimum payments on all debts
Ensure all the minimum payments of your debts each month listed are covered. If you can't, try to adjust your budget by cutting back on expenses, increasing your income, or both.
Using the same example, you should be making minimum payments for these:
Credit Card A: RM50
Personal Loan B: RM100
Car Loan C: RM200
Focus on the smallest balance
If you have extra money after making the minimum payments on all debts, put the extra towards the debt with the smallest balance. Focus your efforts on paying off this smallest debt as quickly as possible.
For example, if you have extra money of RM950, you’ll want to allocate it towards the debt with the smallest balance while still making minimum payments on all other debts. It will look like this:
Credit Card A: RM50 + RM950
Personal Loan B: RM100
Car Loan C: RM200
Snowball the payments
Once the smallest debt is fully paid off, take the money that was previously allocated to it (the minimum payment plus the extra money) and "snowball" it onto the next smallest debt on your list.
This means you'll now be paying more than the minimum payment on the second smallest debt. Repeat this process for each subsequent debt, rolling over the payments from the previous debts onto the next ones.
So, as you pay off each debt, the amount you can allocate towards the next debt will grow. This creates a snowball effect, where the repayment power increases with each debt you eliminate.
Overtime, your debt repayment should look like this:
Credit Card A: RM0
Personal Loan B: RM100 + RM50 (previous minimum payment) + RM950 (assuming you have extra)
Car Loan C: RM200
#3 Debt Consolidation Loan
If you are juggling multiple debt payments with varying interest rates and due dates, a debt consolidation loan might just be the most practical option for you.
This method involves taking out a new loan to pay off various debts and consolidating them into a single loan with a potentially lower interest rate.
So, with only one loan to manage, it becomes easier to keep track of your debt. This simplification can reduce the likelihood of missed payments, which are crucial for maintaining a good credit score. Most of the time, these loans will also have a fixed repayment period so you know you won’t be burdened with endless compounding interest over time.
To be eligible, applicants typically need to have a stable income and a good credit history. Some banks may also have minimum and maximum loan amount requirements. Additionally, the application process involves submitting financial documents like pay slips, employment details, and information about your existing debts.
3 Tips To Pay Off Your Debt
Tip 1: Pay them off ASAP if you can
Although the three methods above would help significantly in paying off your debts over a period of time, if you can afford it, it is good to pay off these debts all at once.
Tip 2: Pay extra attention to your credit card debt
Credit card interest rates in Malaysia can be very high, often exceeding 15-18% p.a. This is why it is crucial to pay off credit card balances in full and on time to avoid incurring high interest charges.
If you cannot afford to pay off the full balance, try to pay more than the minimum amount to reduce the interest charged. Sometimes, the credit card provider or bank may offer to convert your credit card debt into a fixed-term personal loan, which lowers your interest rate. You can consider this.
Tip 3: Take the fees into consideration
Although the interest rates for personal loans are much lower compared to credit cards, do note that these interest rates are relatively higher compared to mortgage and hire purchase loans.
Additionally, beware of the fees when applying for a personal loan. These fees include processing fees, late charges fee or penalty fees, which can add up to your cost of borrowing.
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