Trapped In Deb

Does it feel like everything you earn just goes to debt repayment? Are you getting burned out looking for additional income streams just to make ends meet and comply with loan payments? It’s a difficult and frustrating situation, but knowing why you can’t get out of it can help you take steps to break free.

Here are the common reasons why you feel stuck in never-ending debt even though you always pay your dues:

Remember: your debt has processing fees, interest, and other charges.

The first thing you should do is to take another hard look at your loan agreement. People frequently forget that loans are not just about the principal amount you receive. For example, if you applied for a loan, the lender still needs to release to you the full amount you applied for. Then, there are fees as well, depending on the loan type you applied for.

If you avail of a loan from a bank, there are processing fees, annual fees, legal fees, and/or account maintenance fees. And for personal loans, Singaporean banks typically impose a processing fee of 1% to 3% of the loan amount. This fee has a cap of SGD 200.

On the other hand, if you apply for a loan from a licensed money lender, you must expect higher processing fees. They can charge up to 10% of the loan amount. This is why it is crucial to do your research and compare fees and charges before deciding where to apply for a loan. Do more research regarding quick money lenders and check whether the processing fees and interest they are offering comply with Singapore’s laws.

Identify the culprits of the vicious debt trap cycle

High interest rates and making only minimum payments are not a good combination. When you pay just the minimum required amount each month, a significant portion of your payments goes toward interest. Instead of reducing the principal debt, it results in a vicious, never-ending debt cycle.
The Role of Interest Rates

Interest rate is a percentage of the total amount you owe the bank or lending institution. You agreed to this rate when you signed the loan agreement. This rate usually applies to your loan each year, including any fees and other costs. However, note that this does not include costs related to compounding. Interest rate also does not factor in the effect of inflation. However, your loan agreement might have provisions in case of extraordinary inflation and how it will affect your debt.

Accrued interest is the amount of money earned in interest and added to the loan's principal balance. In effect, it increases the total amount of your debt. This is on top of the interest that is typically charged based on your loan's interest rate and remaining principal amount. If you pay your loan monthly, the interest will accrue daily based on the outstanding balance. At the end of the month, the accrued interest is added to the total amount of your debt. This continues until you completely pay your loan.

Compounding interest also makes your debt balloon over time. The more time it takes you to repay it, the worse it gets. You accumulate more interest payments and this will regularly increase as long as your debt remains unpaid.

Strategies for paying more than the minimum

To address this, make larger payments more than the minimum required. This can help reduce the total interest and shorten the loan term. Also, look for other possible silent culprits for more spending, such as emergencies, credit traps, and lifestyle inflation. Explore how to cut those problems down so you can pay off your high-interest loans and debts faster.

However, this solution is simple and yet challenging to execute. After all, you can’t pay a good chunk of your debts since you are still struggling financially. However, you have to accept the fact that the longer you take to pay your debt, the more it turns into a burden.

Here are some practical tips on making more than bare minimum payments. Remember how this can help you in the long run.

  1. Examine your current spending habits and evaluate if there are expenses you can eliminate or reduce
  2. Create a budget and stick to it, especially when it’s hard to do so.
  3. Review your existing debts. Make a matrix outlining the total debt amount, maturity date of the loan, monthly payment requirement, and interest rate. If something does not add up or is not that clear to you, feel free to inquire from your bank or lender.
  4. Prioritize high-interest debts. Use your bonuses and any lump sum money you receive to make a dent in those payments.
  5. Look for more income streams. Upskill and take advantage of free webinars. Reflect on hobbies and interests you can monetize.

Do not fall for lifestyle creep

Did you get promoted or land a job that pays more than you previously received? Were you able to set up a business that is now starting to grow? Undoubtedly, you were able to achieve these things through your persistent hard work. You deserve to treat yourself, right? Of course, you do. It’s not bad to buy your favorite food occasionally or go to places you have never been to before. It’s not a sin to relax and take time to rest and recover. However, do not let it become habitual. When you regularly “treat yourself”, the treat is no longer something to look forward to.

Be careful to regularly spend on non-essential items and luxuries. This can lead to an increase in their overall expenses. You will be surprised at how it can derail your financial goals. Choose to pay your debts instead. Choose long-term satisfaction over short-term happiness.

Conclusion: You can break free of the debt cycle if you want it enough

You are not alone. Many Singaporeans continue to grapple with financial challenges. As a country with a high cost of living, ongoing debt is a common reality. The burden often stems from inadequate financial literacy, unexpected emergencies with no contingency funds saved up to address such emergencies, and a lack of proactive debt management strategies.

Nevertheless, being debt-free, or at least significantly reducing it, is always a good thing. So aim to learn more through financial education. Look for free seminars. Research government initiatives on financial literacy and participate in these initiatives. Make it a goal to build emergency funds.

Ask your lender for debt reduction approaches and options if you have existing debt. You can break the cycle of debt and achieve long-term financial stability if you have the patience, determination, and willpower to overcome your current financial situation.