Realistically Manage Debts to Achieve Your Financial Goals

It’s easy to accumulate debt, but any debt can reasonably be managed. Mastery of debt can also allow you to leverage it to create wealth.

Disclaimer: This post aims to educate and not to give financial advice. Investments have different risks, and it is up to the investor to do due diligence and make decisions regarding his money.

We’ve probably all got into debt at some point in our lives. Even as children, we’ve tried borrowing money from friends to buy something we wanted. Since childhood, we’ve also been easily forgiven when we didn’t fully pay our loans.

However, things change when we become older. Loans are harder to get and pay, mainly due to interest. If you borrow through banks, you will need collateral; if you borrow through companies, you need proof that you can pay; if you borrow through personal connections, you must be vetted.

This is why it is usually easier to borrow from family and close friends, as they know you and where you live. But even that has a downside: you exhaust your social capital with them.

What Makes Debt So Hard to Repay?

The main reason is that you pay for debt today using your future earning capacity. We don’t know what will happen in the future, but we’ve locked ourselves into an obligation we need to follow.

What complicates things is if we go into debt but our future earnings are non-existent or insufficient. In this case, we spiral into more debt because we must borrow more to pay our current obligations.

What are the Types of Debt?

There are different types of debt, but what we typically experience are three types:

• The Personal Loan
• The Revolving Credit
• The Installment Debt

A personal loan involves borrowing a certain lump sum and paying it back, typically with added interest and a deadline.

The revolving credit has no deadline but a maximum amount limit. The interest we pay is from the balance after the minimum amount we must pay monthly.

The installment debt involves paying off a large amount in smaller, more manageable payments, with the interest folded into the payments.

These three are also the types of loan products we get from GCash: GLoan, GCredit, and GGives, respectively.

What is an amortizing loan?

This loan is tied with amortization or mortgages. The interest is calculated mainly on the remaining principal balance.

If you pay more than the obligated amount per month in your payment schedule, the extra payment is used to pay down the principal, resulting in lower interest rates on the remaining loan.

For amortization, there is an incentive to pay more per month as the extra payments go to the principal.

Some examples that use this are housing loans and car loans. Loans from SSS and PAG-IBIG are also amortizing.

What is a loan that has an add-on rate?

For this type of loan, the interest is calculated using the total principal amount, subdivided equally by the number of payments in your schedule.

If you pay more than the obligated amount per month, it doesn’t decrease the principal at all — you pay to cover the next schedule without any benefits. Even if you pay off the loan early, you still pay the full interest amount.

For add-on rate loans, there is no incentive to pay more unless you want to end your loan early.

Some examples that use this are GLoan and loans offered by some loan apps. “Paluwagan” and “5-6” loans also follow this scheme.

How to Get Out of Debt

Acceptance

The first thing you need to do is accept that you have an obligation and fulfill this obligation as soon as possible. Often failing to pay your debts incurs consequences like being blacklisted from credit bureaus and banks. This makes it harder for you to tap wealth management products.

You won’t get jail time in the Philippines due to debts, as this is a constitutional right. However, this won’t prevent you from getting sued nonetheless. Creditors can demand payment, and civil cases can force you to pay penalties and interest.

Some creditors (like loan apps) resort to harassment and humiliation to make you pay. You can report these to their respective government agencies if you are a victim of these practices.

Restructure Your Debts

Once you’ve committed to paying off your debts, one thing that can motivate you to start is to seek restructuring. If you’ve personal debts to people, you can negotiate longer repayment schedules in exchange for lower interest rates.

This is especially true for credit card companies. You can call collections agencies and try to negotiate more favorable terms for your existing loans.

In my experience, I had a lot of credit card debt coming into the pandemic a few years ago and couldn’t manage the high interest rates. I also borrowed cash from my credit card to pay for my other loans, which made my loans accumulate uncontrollably.

I negotiated with all of the credit card companies, and I was able to do a straight buy-out for some of my debt with a considerable discount and negotiate long repayment schedules for a couple of others. I’m still paying for these debts now and will do so until 2026.

I do not recommend restructuring your loans by consolidating them. When you need to do that, it’s often too late.

Prioritize Paying it Off

There are two ways to pay off debt: snowballing or avalanche.

Debt Snowballing means paying off the smallest debt first while making minimum payments for the others. Once the smallest is paid off, you move on to the next smallest. This method motivates you because you can see your progress via quick wins.

Doing a Debt Avalanche is the other way around, focusing on the big debts with the highest interest rates while making minimum payments for the others. Once you’ve paid the biggest one, you use the same amount to pay off the next highest debt. This saves you more money on interest over a long period.

Don’t Invest Windfalls

If you get a windfall, paying off debts first is better than investing them. The interest rates you get from investing are often lower than the negative interest you incur from your current loans. Proceeds from investing are often taxed as well.

The faster you pay off your loans, the greater the potential for growth in your future investments once you are free from your debt burden.

You can also use your debt repayment habits to fuel your investment habits in the future. You can invest the same amount you’ve been paying for debt and eventually do *investing* snowballing or avalanche.

Investing in Yourself

Often, people try to tighten their belts when they need to pay off debt. They look for things to take away, like cutting off subscriptions or budgets to be able to service their debts. This often brings despair and can also fuel negativity as you focus on depriving yourself.

Another way to do this is to invest in new skills and know-how to increase your income. This will also not betray you; you won’t lose any skills you learn. Focus on creating more value with your skill set, and the higher income will help you pay your debt sooner, as you are working from a place of plenty, not scarcity.

It is harder to do, but it is also worth it.

How to Leverage Debt

Working with debt has taught me more about money. I’m not controlled by it; I see it as a resource for fulfilling a need. Those who try to avoid debt will not be able to react appropriately once they get into it.

I even think we need to get into debt to learn financial literacy—similar to learning to swim; the more important skill is not the act of swimming itself, but actually not being afraid of the water.

Once you’re not afraid to get into debt, you will realize you can leverage it in many ways to make your life easier. Here are some ways you can leverage debt to your advantage:

• Real Estate Investments – Taking a mortgage to buy rental properties can help you earn passive income as long as the rent is higher than the debt you need to pay
• Business Loans – You can loan to buy more inventory or to purchase equipment, which can help you increase your revenue
• Education Loans – You can invest in your education, and this can result to higher-paying job opportunities
• Tax Benefits – You can borrow against an asset you own, like stocks or real estate, and since loans are not taxable, you can avoid capital gains taxes or even offset it

One notable thing Elon Musk did to raise funds to buy Twitter (now X) was to use his Tesla stocks as collateral to loan the amount he needed. If Tesla gains in value while paying his debts, he can use the gains to pay off the interest.

I don’t shy away from using debt as an instrument to pursue goals if needed. This is one lesson I’ve learned in my journey with money.

Wrapping Up

I’ve explained how debt works, how to manage debt, and how to leverage debt. I aimed to share all that I learned while managing mine. I am still no expert, but I’d like to think that this will help you and everyone else who is also on their personal finance journeys.

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