Debt repayment plan

Once you decide whether to say “Yes” or “No” to a loan, the next step is to decide how you’ll repay the loan, how you’ll save and cut spending, and importantly, how you’ll pay it off and on what schedule.

Inappropriate and ineffective calculation and arrangement of repayment plans can lead to significant financial pressures, affecting yours and your family’s daily lives. In general, people are always prone to be insecure, worry about the uncertainties, and do not anticipate the consequences they could face. However, no matter what kind of pressure or difficulty you face, if you are well prepared, have specific plans, and feel confident, the problem solving will be much easier and more effective.

As mentioned above, loans can essentially be classified into two types based on the criteria of whether there is collateral or not to secure the repayment.

An unsecured consumer loan has a higher interest rate than your savings rate or even your annual salary increase, so you need to adhere to the repayment schedule signed with the lender, otherwise, it’s better for you to pay it earlier.

In order to make a good debt repayment plan, saving money every month from earned income is not enough, you need to follow few more steps, like the ones below, to complete your plan.

LIST AND CLASSIFY DEBTS

You should record all outstanding debts as follows:

You need to list debts by interest rate, from high to low, since the order of priority for repayment should also follow that order, not to mention the fact that high interest debts will require a larger amount of money to repay them. Paying off your debt this way will help you save a lot of money.

ALLOCATE RESOURCES AND PRIORITIZE DEBT REPAYMENT

STEP 1

All loans have a clause allowing interest rates to be increased if you do not repay the loan on time (usually the penalty is 150% of the loan interest rate at the time of late payment). At the same time, your credit history throughout the banking system will also record this event and reduce your credit score for future loan transactions (if any).

Thus, if you have more than one debt, you must allocate funds to make scheduled payments for all of them.

STEP 2

If you still have some money left after deducting scheduled repayments and monthly expenses from your income, you should consider using that amount to pay more of your highest interest rate loan to reduce as much interest as possible. However, in this case, you need to pay attention to the penalty interest rate, in case prepayment incurs any additional fees according to the rules in the signed credit contract.

For example, Tuan has just taken out consumer loans to buy a motorbike (with an interest rate of 5% per month) and buy a house in the future (with an interest rate of 9% quarterly). He should give priority to paying the loan with higher interest rate, i.e. the car loan, to avoid extending the loan term and incurring a late payment penalty.

TIME TO REPAY DEBT

Unless you have a business or an investment where the expected return is higher than the loan interest rate, your first priority should be to repay the debt as fast as possible. This is to reduce interest and focus on saving to repay the debt, minimizing burden in the event of short-term income loss.

For example, if Mai suddenly suffers from serious illness over a short period, she’ll have to spend all her salary on treatment. If she has income other than her salary, such as a scholarship, she should pay off the loan to avoid the increased interest while her health isn’t fully recovered.