How do you get rid of your debts faster? The general answer is by putting extra repayments into the loan. You will know how much you can put into extra repayments by going back to the basics and coming up with a budget. From there you will need to decide whether you need to cut down some expenses to come up with the money or you have a way of generating more income for yourself. The choice is yours. By putting in extra repayments into the loan you are cutting down the total amount of interest you would pay over that time as well as well as the loan period.
The questions I receive from readers revolve round how this process works if you have more than one loan. I have been asked “Which one should I start with”? Should I spread the extra money I have and put an extra amount in all? “Should I start with the one that has the highest interest rate”? Firstly, you should always focus on one debt at a time. Continue making minimum repayments on all but put the extra amount into one specific loan until it is finished. How do you decide which loan to focus on first? In the course of working with people in restructuring their finances, I have used various options. People mostly tend to work with the one that has the highest interest rate. This is not wrong and in fact logically makes sense. However in my experience, I have found that dealing with the one that has the shortest time remaining has led to better and faster results. For example if you had two loans- one remaining with 48 months before you finish paying it off and the other remaining with 12 months, put your extra repayment towards the one that has 12 months.
The effect of this is twofold. You will obviously finish it faster. Most importantly by finishing it faster you have released some cash flow back into your budget. Secondly, the fact you have accomplished something quickly will give incentive to continue the process. Chances are if you start with your longest debt, you may get tired or discouraged and give up along the way. Once you have paid of the first debt, use that money (both the minimum payment you were making plus the extra amount you started putting in) to clear the second debt. Unless you have some extremely pressing needs, it is advise able to commit the entire amount into finishing off the second debt. Once you are done with that one, do the same for the third one, and so on.
With this way, you will have cleared your debts within a shorter period. You can then use that extra money towards your personal expenditure requirements and/or savings and investment. For example if your total debt payments per month are Kes 20,000. If you finish paying them off 10 months earlier, that is Kes 200,000 you can now use for something else. Being in debt is not the end of the world. It can be managed especially if you commit to a plan to pay it down as quickly as possible.
Waceke Nduati-Omanga
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