• How to pay off your loans faster

    The total personal debt in the UAE is over AED420 billion. The total household debt in the UAE is 2/3rd of the total household debt in the GCC. The personal debt includes credit card, car loans, personal loan, and mortgages.

    You must take a loan only when it is a necessity and is going towards a productive use and when you know that you can repay them comfortably. Read on if you have a huge debt and are wondering how to get rid of it faster and in a cost effective way. Most often a person ends up defaulting on a loan because they miscalculate the one they think they can settle sooner.

    Repayment strategies to become debt free

    Following are the ways you can repay faster and become debt free:

    • Debt stacking:

      It is a loan repayment method that helps you get rid of the most expensive debt sooner. You can use the debt stacking in the following way:

      • Rank your loans based on the interest rate in a descending order.
      • Aim to pay off the top ranking loan that is the loan with the highest interest rate.
      • Pay the instalment on your loans and your minimum amount due on your credit cards.
      • Avoid late payment fees at any cost.
      • Use the money that you have left or the amount that you save to pay off your most expensive loan.
      • Once you settle the most expensive loan, move onto the next most expensive loan.
      • Continue to do so till you have paid off all your loans.

      This method cuts down the time you would’ve taken to settle your loans. For instance if you have a credit card loan of AED5000 at APR 25% and another credit card debt of AED10,000 at APR 30% and a car loan of AED40,000 at 6% per annum and a personal loan of AED50,000 at 4% per annum. You will use the debt stacking method and rank them as follows:

      1. AED10,000 at 30% APR.
      2. AED 5,000 at 25% APR.
      3. AED 40,000 at 6% per annum.
      4. AED50,000 at 4% per annum.

      You will save money when you clear off the high interest loan as you are saving on the exorbitant interest rates. The only drawback of this method is that if your highest interest loan has the highest outstanding balance, you will take a long time to repay it and it will demotivate you.

    • Debt snowballing:

      Under this method you go in an ascending order. You will be paying the minimum payment towards all your debts but you try to clear out the smallest loan first. As the outstanding balance is low, you will settle it faster and wipe it off your books faster.

      Taking the above example, you will be clearing the loan in the following way:

      1. AED 5,000 at 25% APR.
      2. AED10,000 at 30% APR.
      3. AED 40,000 at 6% per annum.
      4. AED50,000 at 4% per annum.

      This method is not cost effective as the debt stacking method. The smallest loan that you pay off will be charging the lowest interest rate. This means that you still have to deal with the expensive loan and keep paying heaving interest on them.

    It is always best that you compare the loans before you take one. Take a loan only after you have settled your previous loans. This way you can avoid falling in a huge debt.

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