Drowning in Debt? How to Eliminate the Common Types of Debt

Published: April 25, 2019 | Updated: July 30, 2020 | Posted by: Venus Zoleta | Personal Loan

Types of Debt Philippines | Moneymax

One of the last things anyone would like to happen: having too much debt. But it does happen when debt is managed poorly. It’s bad for one’s mental health as it is to the wallet.

And so, taking proactive steps to solve this financial difficulty is a lot better than wallowing in anxiety and worrying over your unpaid obligations. It all starts with having a firm resolve to pay off what you owe, regardless of the types of debt you have and how you went into debt.

Here are the common types of debt in the Philippines and how to pay them off, so you can get your finances back on track.

Credit Card Debt

Types of Debt - Credit Card Debt

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PHP 297.49 billion—that’s how much credit card debt Filipinos have as of February 2019, based on data from the Bangko Sentral ng Pilipinas. Apparently, unpaid credit card balances are among the types of debt that are easiest to accumulate. One seemingly harmless swipe in a cafe can snowball into hard-to-manage debt that can go as much as six-digit figures.

Three things make credit card debt among the most challenging types of debt to pay off: high monthly interest rates (ranging from 2% to 3.54%), low minimum monthly repayments (ranging only from 3% to 10% of the total outstanding balance), and other credit card fees on top of the unpaid balance.

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How to Pay Off Credit Card Debt

If you’re in credit card debt, know that the situation won’t last and you’ll get out of it—only if you start paying it down now. Below are the steps to tackle all your credit card debt.

1. Know How Much Credit Card Balance You Have to Repay

Request an updated account statement for your credit cards from each provider. List down your total outstanding balance and interest rate for each credit card.

2. Know How Long It Will Take You to Repay

Take stock of your income and expenses, then determine the amount you can set aside for your monthly repayments. In doing so, you can set a timeline for paying off your credit card debt.

3. Ask for Credit Card Debt Restructuring

Contact each bank where you have credit card debt. Let the bank know the reason you can’t immediately pay off your unpaid balance and what you can realistically afford.

Then negotiate a restructured credit card debt. The bank may agree to lower your interest rate and/or extend your repayment term to make your monthly payments more affordable for you.

Consider applying for credit card amnesty, the Interbank Debt Relief Program, to settle your unpaid balance more easily.

4. Pay Off the Card with the Lowest Debt or Highest Interest Rate First

Debt snowball and debt stacking are two of the most popular ways to pay off not just credit card debt but also all other types of debt.

The debt snowball method makes reducing the number of debts faster, as the smallest debts get repaid first. However, it could cost you more over time, as the higher-interest debts keep getting higher as time goes by.

Meanwhile, the debt stacking method involves paying off credit card debt, starting from the card with the highest interest rate. Arrange your credit card debts, including your other types of debt, from the highest to lowest interest rate and pay them off in that order.

5. Get a Balance Transfer Credit Card

You might want to move your credit card debt to a balance transfer card with 0% interest that allows you to repay without incurring extra interest. Note that the 0% interest offer is good for a limited time only and changes to a higher rate after the introductory period, so make sure to pay off your credit card debt before that period ends.

Read More: Credit Card Balance Transfer: 8 Things Cardholders Need to Know

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Car Loans

A few years ago, you took out a car loan to purchase a vehicle you’d never have if you paid in cash. You’re confident back then—you could afford the down payment and monthly amortizations because of your stable job that pays well.

But then the unexpected happened. You lost your job, you or a family member got seriously ill, your home got damaged due to a natural disaster, or something came up that messed up your finances. Apparently, you can no longer afford to repay your car loan.

Read more: What Happens If You Stop Making Loan Payments?

How to Pay Off a Car Loan

So how do you deal with such a situation? Here are tips to manage your missed or late car loan payments and avoid a heart-breaking vehicle repossession.

1. Make Additional or Lump-Sum Repayments

To pay off your car loan faster, pay more than your monthly amortizations. While this sounds like a challenge, what with your difficult financial status, you can find ways to increase your income and use the extra earnings to pay down your car loan.

2. Refinance Your Auto Loan

Are your monthly car loan payments taking much of your budget? Consider changing to a new loan with a different lender that offers a more favorable term, like a lower interest rate and lower monthly repayments.

Banks like BPI and Security Bank, as well as some private lenders in the Philippines, offer car loan refinancing or car loan take out to help distressed car owners pay off their debt. But before you avail one, weigh the pros and cons of car loan refinancing to see if it’s the best way to get out of debt given your situation.

3. Modify Your Car Loan

Car loan modification, if your lender allows it, is another way to settling overdue car loan payments more manageable. It may involve lowering your loan’s interest rate and monthly amortizations (by extending the repayment term) or suspending/lowering monthly payments for a limited time.

Call the bank to explain why you can’t repay your car loan with its current structure. Ask also if it will agree to modify your loan, so you can afford to pay it off.

Read more: How to Negotiate Your Car Loan Payments

Debt to Family and Friends

Types of Debt - Debt to Family and Friends

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The most common and convenient way for many Filipinos to cover an urgent financial need is to borrow money from family and friends. Since it’s one of the informal types of debt, it involves no document requirements, written loan agreement, interest rate, and physical collateral. Payment terms are flexible, as the borrower and lender undergo an arrangement based on trust.

But then when trust is broken because of failure to pay one’s debt, the relationship get ruined.

How to Pay Off Debt to Other People

What should you do if you really want to pay back the amount you owe but currently don’t have the means to do it?

Communication is the key. Nothing irritates a lender more than giving them the impression you have no plans of repaying the money you borrowed. Explain the problem that keeps you from paying off your debt and assure them that you’re taking actions to solve it. Also, constantly update the lender about when and how much money you can repay per period. Even if you can’t repay the full amount, make an effort to pay back a portion of the amount per week or month.

Final Thoughts

No matter what types of debt you’re trying to pay off, make it a priority so that you can move on to your other financial goals. Every time you get an increase in income (like a raise, bonus, or commission), use it to pay down your debt. When things get tough, never lose sight of your main goal, which is to clear your debt and gain financial freedom.

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