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How to best manage your personal financing payment strategy

You'll probably take up at least some financing in your lifetime, based on your needs and goals at any point in time. As there's a wide range of financing facilities available out there in the market, such as personal financing, mortgage financing, renovation financing, education financing, vehicle financing, credit card balances and personal lines of credit, it's a good idea to think about which financing you should fully pay back first, and which can be paid off more gradually.

A good start in prioritising which financing to fully pay off is making sure you do your homework in comparing profit rates and outstanding tenors.

Essentially, there are 2 ways to manage your outstanding balances - you can either choose to pay down the facility with the highest profit rate first, or pay off the facility with the least outstanding balance first. It's important to remember, however, that these 2 methods are not applicable to structured financing, such as mortgage, vehicle and renovation financing.

The debt avalanche method

Focusing your resources on paying off debt with the highest profit rate is a debt avalanche strategy. Using this method to shave off your debt will most likely see you paying off debt in a shorter time period.

The debt snowball method

The other payment option you could choose is the debt snowball method, where you pay off your debt starting with the lowest financing facility. This could help reduce the total number of outstanding financing facilities you have, and the upfront, small wins at completely clearing a facility may help you feel less overwhelmed.

Which method makes more financial sense?

Let's say you have 4 financing facilities to pay off, each with a different profit rate and outstanding balance.

This table illustrates the 4 facilities and their respective outstanding balances1:
Type of financing
Profit rate
Total outstanding financing balance
Credit card A
18% p.a.
RM2,000
Credit card B
15% p.a.
RM12,500
Line of credit
18% p.a.
RM1,000
Balance transfer
10% p.a.
RM8,000
This table illustrates the 4 facilities and their respective outstanding balances1:
Type of financing
Credit card A
Profit rate
18% p.a.
Total outstanding financing balance
RM2,000
Type of financing
Credit card B
Profit rate
15% p.a.
Total outstanding financing balance
RM12,500
Type of financing
Line of credit
Profit rate
18% p.a.
Total outstanding financing balance
RM1,000
Type of financing
Balance transfer
Profit rate
10% p.a.
Total outstanding financing balance
RM8,000

If you use the debt avalanche method, that means you'd choose to pay off credit card A first, because it carries the highest profit rate of 18% p.a. Even though credit card B has a higher outstanding balance of RM12,500, it's got a lower profit rate of 15% p.a., so you'd turn your attention towards paying it back fully after you've paid the outstanding balance of credit card A.

If the debt snowball method's what you choose, you'd opt to pay off your line of credit first as it carries the lowest outstanding balance of RM1,000. After you've cleared that completely, you'd then shift your priority toward fully paying off credit card A, followed by the balance transfer and finally credit card B.

Whichever method you choose, be sure you at least make the minimum required payments on your debt balance. If you're able to, try to clear more than the minimum required payment in order to shorten your payment period and lower the management fees. For example, if your credit card only requires you to pay off 2% of your balance every month, simply paying that amount would prevent you from being charged late payment fees, but it's not really going to go toward paring down your outstanding bill if the profit rate levied on the card is 18% p.a.

Ultimately, if you don't want to be saddled with mounting profit payments that can really add up substantially over time, it makes more financial sense to rely more on the debt avalanche method to pay off your debts.

Debt payment tools

We've got some great debt payment tools for you to manage your debt portfolio. You could actually take on a personal financing facility to clear your outstanding credit card balances. HSBC Amanah Personal Financing-i offers financing of up to RM250,000, spread over a tenor of up to 7 years2. Since personal financing profit rates range from 7.5% p.a. to 12.5% p.a., with Premier customers getting a 4.88% p.a. profit rate, this is a great option if you've got credit card debt carrying a significantly higher profit rate ranging from 15% p.a. to 18% p.a., or even more. Plus, you get the perks of a longer payment period3 to help reduce the stress of clearing your debt.

Another tool you can pick if your total unsecured financing is debt consolidation, which combines all your debt into just 1 personal financing facility3. The HSBC Amanah Personal Financing-i Debt Consolidation feature offers you the chance to refinance your outstanding debts into 1 term financing, for which you can make fixed monthly payments over a period of 2-7 years.

All in all, financing offer you a ticket to chase your dreams, whether it's buying a new home, furthering your studies, or opening your own cafe in Bangsar. If you manage your debt payment plans optimally, you'll not only be able to reap benefits like profit savings; you'll also be able to pursue those dreams with much-needed peace of mind.

 

1 Chart and rates shown are for illustration purposes.

2 Subject to bank approval.

3 Subject to eligibility criteria.

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