Your Ultimate Guide on How to Clear Debt Fast in Singapore

how to clear debt fast

Singaporeans are navigating a challenging debt landscape, intensified by COVID-19’s economic impacts. Despite the manageable overall debt situation, as highlighted by Minister Alvin Tan, financial stress remains for individuals and businesses. 

Notably, a rise in younger Singaporeans seeking debt assistance has been observed, with agencies like Arise2care Community Service witnessing a 50% increase in help requests over two years. The pandemic’s job and income losses have forced many into borrowing for basic needs and mortgages. 

This article discusses understanding debt, government relief efforts, and practical repayment strategies to help Singaporeans manage their finances and secure their financial future.

Understanding Your Debt

Debt is money owed by one party to another, as defined by Investopedia. It’s a common financial tool for making significant purchases that wouldn’t be possible otherwise. It’s important to note that debt must be repaid unless forgiven, usually with added interest.

“If you live paycheck to paycheck, and something like COVID-19 happens, often you do not have enough savings to service your debt, resulting in late fees and more interest,” explains Jean Lee, communications manager at Adullam Life Counselling.

Types of Debt

Debt comes in various forms, each with its unique terms, interest rates, and repayment conditions. Here’s a brief overview of common types of debt:

  • Credit Cards: Using a credit card is akin to taking out a small personal loan. If the balance is paid off immediately, no interest is charged. However, if there’s an unpaid balance, interest accumulates monthly until it’s fully paid.
  • Personal Loans: Offered by both physical and online banks, personal loans can be used for various purposes, from buying a new gadget to paying bills. These loans are unsecured, meaning there’s no collateral required, but they can be expensive due to the lack of security.
  • Mortgages: Loans specifically used to purchase property or real estate. The property itself serves as collateral for the loan.
  • Student Loans: Borrowed money to pay for education expenses. These loans can be federal (government-funded) or private (funded by banks or other financial institutions).
  • Auto Loans: Loans taken out to purchase a vehicle. The vehicle serves as collateral until the loan is fully repaid.
  • Medical Debt: Money owed for medical expenses. Unlike other forms of debt, medical debt often accumulates due to unforeseen illnesses or accidents.
  • Payday Loans: Short-term, high-cost loans designed to cover immediate cash needs until the next payday. These loans come with extremely high interest rates.
  • Home Equity Loans: A type of loan in which the borrower uses the equity of their home as collateral. These loans can provide large amounts of money at once for large expenses or to consolidate debt.
  • Business Loans: Loans specifically for business purposes, which can be used for startup costs, expansion, or as working capital. They can be secured (requiring collateral) or unsecured.
  • Overdrafts: A facility allowing individuals to withdraw money from their bank account even if the balance goes below zero. It’s a form of short-term borrowing with usually high fees.

Debt Repayment Strategy to Pay Off Loans 

Strategy 1: Increasing Debt Payments

Allocating more money towards your debt repayment accelerates the process significantly. Krisstin Petersmarck, an investment advisor representative at Bridegriver Advisors, emphasizes the importance of having realistic goals when tackling your debt for the first time.”

Here’s how:

  • Manage Finances: Review your budget and identify areas where you can allocate more funds towards debt repayment. Prioritize paying off high-interest debts to reduce overall interest costs.
  • Cut Discretionary Spending: Reduce non-essential expenses such as dining out, entertainment, and subscription services. Redirect these savings towards your debt payments.
  • Increase Income: Explore ways to boost your income, such as taking on a part-time job, freelancing, or selling items you no longer need. Use the additional income to make larger debt payments and accelerate your debt repayment process.

Strategy 2: Lower Interest Rates

Reducing the interest rate on your debt can save you a considerable amount of money.

  • Credit Cards vs. Personal Loans: Credit card interest rates are typically higher than those of personal loans (approx. 7 – 10% per annum). Consider transferring high-interest outstanding credit card debt to a lower-interest personal loan.

Consider the Standard CashOne Personal Loan as an example, which offers a competitive interest rate of 2.88% per annum, with an Effective Interest Rate (EIR) of 5.84% per annum, available for terms up to five years.

  • Debt Consolidation Plan: These plans can help consolidate multiple high-interest debts into a single loan with a lower interest rate, making repayments more manageable.
  • Balance Transfer: A balance transfer offers a temporary loan that shifts your existing debts to a zero-interest plan, eliminating the burden of accruing interest and allowing you to concentrate on repaying the principal amount. 

With an introductory offer of 0% interest for a period ranging from 3 to 12 months, you can avoid additional interest charges on your debts by ensuring the full repayment of the balance transfer amount within this grace period. This strategy facilitates a more focused approach to clearing your outstanding balances without the added pressure of growing interest fees.

Strategy 3: Choose Your Approach

According to Jannese Torres, there are two main strategies: the snowball and avalanche methods. Both focus on paying more towards one debt while maintaining minimum payments on others.

  • Avalanche Method: Prioritize debts with the highest interest rates for faster and more economical debt elimination. 
  • Snowball Method: Focus on clearing the smallest debts first, creating motivational wins that encourage continued debt repayment.

What experts say: “With the avalanche method, you prioritize paying off debt from highest to lowest interest rate,” Jannese Torres, creator and host of the “Yo Quiero Dinero” personal finance podcast, explained in an article by HuffPost. “When the higher-interest debt is paid off, you put that money toward the account with the next highest interest rate and so on, until you are done.”

“With the debt snowball method, you prioritize paying off your debts from the smallest to largest amounts,” Torres further explained. “Once the smallest debt is paid off, you take the money you were putting toward that payment and roll it onto the next-smallest debt owed. You continue this process until all accounts are paid off.”

Strategy 4: Make a Budget

Understanding your financial inflow and outflow is crucial. Use apps or spreadsheets to track your income and spending. This visibility helps you identify where adjustments can be made to free up more money for debt repayment.

Andrea Woroch, a money and budgeting expert, advises looking through your budget for savings, even when it seems tough due to inflation. Every little bit redirected towards your debt can help speed up the repayment process.

Strategy 5: Utilize Windfalls Wisely

  • Allocate Unexpected Funds: If you receive a windfall, such as a bonus, tax refund, or inheritance, consider using a significant portion of it to pay down your debt. This can help reduce your principal balance and interest costs over time.
  • Avoid Temptation: While it may be tempting to spend windfalls on non-essential items, prioritizing debt repayment can provide long-term financial benefits and bring you closer to achieving debt freedom.

Which is the Best Approach? How Can I Pay Off My Debts More Quickly?

The best approach to paying off debt depends on your personal financial situation, motivation style, and goals. However, if aiming for speed and cost-effectiveness, the Avalanche Method stands out. 

  • List Your Debts by Interest Rate: Start by organizing your debts from the highest to the lowest interest rate.
  • Make Minimum Payments on All Debts: Make the minimum monthly payments on each debt.
  • Allocate Remaining Funds to the Highest Interest Debt: After making the minimum payments, allocate the remaining funds to the debt with the highest interest rate.
  • Continue the Process: Maintain this strategy, systematically moving to the next highest interest debt once the previous one is cleared. 

Applying the Avalanche Method Example Scenario

Let’s apply this to a real-life scenario of paying off a debt of S$20,000 in 6 months.

Imagine you have three different debts totaling S$20,000:

  • Credit Card A: S$8,000 at 19% interest rate
  • Personal Loan B: S$7,000 at 12% interest rate
  • Car Loan C: S$5,000 at 6% interest rate

Your goal is to clear all debts within 6 months, and you’ve determined you can allocate $3,500 per month towards your debts.

1. List your debts from highest to lowest interest rate:

  • Credit Card A: 19%
  • Personal Loan B: 12%
  • Car Loan C: 6%

2. Make minimum payments on all debts:

Assume the minimum monthly payments are S$200 for Credit Card A, S$150 for Personal Loan B, and S$100 for Car Loan C. This totals S$450, leaving S$3,050 for additional payments towards the highest interest debt.

3. Allocate remaining funds to the highest interest debt:

For the first month, after making the minimum payments, you would put the remaining S$3,050 towards Credit Card A.

4. Continue the process:

Continue this strategy, moving down the list as each debt is paid off. After Credit Card A is cleared, focus on Personal Loan B, and then finally, Car Loan C.

Calculation Example

  • Month 1: Pay off a significant portion of Credit Card A, significantly reducing the principal and interest accrued.
  • Subsequent Months: As Credit Card A’s balance decreases, more of your S$3,500 can go towards the principal. Once Credit Card A is paid off, move to Personal Loan B, and then to Car Loan C.

Given the high payment amount of $3,500 monthly, you first aim to clear the highest interest rate debt, reducing the total interest paid over time. By the end of 6 months, following this method diligently and assuming no additional charges on these accounts, you would have paid off the entire S$20,000 debt.

Government and Financial Institution Relief Measures

MAS Relief Packages

The Monetary Authority of Singapore (MAS) collaborated with financial institutions to introduce relief packages aimed at supporting individuals facing financial difficulties due to the COVID-19 pandemic.

Helping Individuals Transit to Full Loan Repayments

  • Reduced Instalment Plans: For property loans, allowing reduced payments to ease the transition to full repayments.
  • Loan Tenure Extension: For renovation and non-MOE student loans, providing an option to extend the loan tenure.
  • Extended Assistance: For personal unsecured credit and debt consolidation plans, offering extended support.
  • Application Deadline: It’s important to note that applications for these measures closed on 30 September 2021.

Helping Individuals Ease Financial Difficulties

  • Easing Cashflow: Options included deferring and extending loan repayments, deferring premium payments, and flexible installment plans for general insurance.
  • Reducing Debt Obligations: Measures included lower interest rates on personal unsecured credit and easier refinancing or repricing of investment property loans.
  • Ensuring Access to Basic Banking Services: Waivers for fall-below service fees and failed GIRO deduction charges for retail bank accounts.
  • Expiration: Most of these measures expired on 31 December 2020, with some exceptions like extended assistance for personal unsecured credit and debt consolidation plans.

Eligibility and Application

While applications for most of these relief measures are already closed, individuals need to stay informed about eligibility criteria and application processes for any future relief programs that may be introduced.

The Debt Repayment Scheme (DRS): Alternative to Bankruptcy

The Debt Repayment Scheme (DRS) is a pre-bankruptcy scheme in Singapore designed to assist individuals with managing their debts without resorting to bankruptcy. It allows debtors to repay their debts in installments over a fixed period, typically up to five years. However, participating in the DMP will be noted on your credit report, precluding you from obtaining any new credit cards or unsecured credit facilities within Singapore.

Eligibility Criteria

  • Debt Limit: Total unsecured debts should not exceed a specified limit, currently set at $150,000.
  • Residency: Applicants must be residing in Singapore or have a place of residence in Singapore.
  • Income: Applicants must have a regular income to support the proposed repayment plan.
  • No Prior DRS: Applicants should not have been bankrupt or under the DRS in the last five years.

Benefits of the DRS

  • Avoid Bankruptcy: The DRS provides an opportunity to avoid the stigma and legal implications of bankruptcy.
  • Controlled Repayment: Debtors can repay their debts in manageable installments, based on their financial capacity.
  • Protection from Creditors: Once under the DRS, creditors cannot take legal action against the debtor for the debts included in the scheme.

Application Process

  • Assessment: The Official Assignee (OA) assesses the debtor’s eligibility for the DRS.
  • Proposal: If eligible, the debtor submits a repayment proposal based on their income and expenses.
  • Approval: Creditors vote on the proposal, and if approved, the DRS is implemented.
  • Compliance: The debtor must adhere to the repayment plan and regularly update the OA on their financial status.

The DRS provides a structured and less severe alternative to bankruptcy, allowing individuals to manage their debts while maintaining a semblance of financial stability.

Case Study

Max Leong: From Gambling Debt to Financial Freedom

In 2015, Max Leong found himself caught in the grip of gambling addiction, a habit that led him to accumulate over S$40,000 in credit card bills. His initial success at a casino, where he turned S$500 into S$20,000 in one night, only fueled his addiction. However, the high stakes and easy credit soon turned his dream into a nightmare, straining his family relationships and putting him under immense pressure from creditors.

Determined to break free from his financial prison, Leong’s turning point came when he sought help from Credit Counselling Singapore (CCS), a charity organization dedicated to assisting individuals with debt-related issues. “I only went there for one session; it was all it took to change my whole life,” Leong shared. With newfound knowledge and a clear plan, he embarked on a rigorous journey to repay his debts.

Leong committed to working up to 14 hours a day as a Grab driver and tutor, channeling every possible dollar towards clearing his debts. His relentless effort paid off, and within two years, he successfully paid off his S$40,000 debt, emerging from the ordeal with valuable lessons and a fresh start in life.

Additional Resources

Government Websites

Financial Advice Blogs

  • SingSaver: Offers a range of articles on debt management and financial planning.

Tools for Financial Planning

  • MoneySense: Singapore’s national financial education program provides tools and resources for budgeting and financial planning.
  • Institute for Financial Literacy (IFL) Tools: The IFL provides a wide range of useful financial calculators and spreadsheets to aid in financial planning. These tools cover areas such as budgeting, crisis budgeting, effective interest rate calculations, insurance portfolio summaries, loan amortization, net cash flow statements, retirement planning, and savings goals. 
  • MoneyOwl Comprehensive Financial Planning: MoneyOwl offers a comprehensive financial planning service that includes a customised report detailing your current financial situation, future goals, and steps needed to optimize your Central Provident Fund (CPF) payouts.

Professional Services

  • Credit Counselling Singapore (CCS): A non-profit organization offering personal financial advice and debt management services. They are recognized by The Association of Banks in Singapore (ABS) for helping individuals address unsecured debt through counseling, education, and facilitating debt repayment arrangements. 
  • Financial Planners: Consider consulting with a certified financial planner for personalized advice on debt management and financial planning.

We’ve noticed several common questions about managing debt, so let’s address them:

How long before a debt is written off in Singapore?

In Singapore, the limitation period for most debts is six years from the date of the last acknowledgment or payment. After this period, the debt is considered statute-barred, meaning it can’t be legally recovered.

Final Word

With perseverance, informed decisions, and the utilization of available resources, achieving financial freedom is within reach, transforming financial burdens into a foundation for a secure, debt-free life.

Key Takeaways:

  • Recognize the different types of debt and their repayment conditions. Prioritize debts with the highest interest rates to minimize overall interest paid over time.
  • Utilize government and financial institution relief packages like the MAS relief packages and the Debt Repayment Scheme (DRS) as alternatives to bankruptcy.
  • Increase debt payments by managing finances, cutting discretionary spending, and increasing income. Consider approaches like the avalanche or snowball methods to eliminate debts systematically.

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