After conducting many rounds of our Debt Management Workshop (now renamed to Debt-Free Code workshop), this is the number 1 topic we constantly hear our students’ sharing as their biggest learning. So I wanted to share this topic with you, to get you to be Debt-Free as soon as possible. By applying this simple concept, you can find out your most burdening loan & clear it off quickly. I notice most of my students in debt do not know which debt to settle first, thus squandering the opportunity to get out of debt faster & having to pay more to the bank.
If you have not heard of this case study before, head over here -> How I save RM 10,000 a month by doing a Debt Consolidation. Find out how I help James do it. In fact, you can download my free eBook for the whole case study described in 1 place HERE
So coming back to James’s situation, if you recall, he had many loans which cannot possibly fit into his Debt Consolidation strategy. By using IBR% = Installment Burden Ratio calculation (a term I invented), you get to find out the most burdening loan and settle it first.
First, let’s understand which category you fall into, are you in Category A or B?
Mind you that this strategy works best for Category B. This is so that we can stop the negative cash flow (‘bleeding’) and save him from dying (literally). Imagine someone just met an accident and is in the emergency room. You want to stop the bleeding so that the victim can survive the trauma before finding out about other injuries he is having.
Secondly, let’s understand the background. I want you guys to look at these numbers below which I’m going to share with you later how we calculate this number.
The key point here is, the higher the IBR%, the more burdening that loan is to you.
So how do we decide which loan to consolidate first, since we definitely can’t fit (consolidate) a total of RM752,000 into a loan of RM350,000
So, we take the loan which has the highest IBR% first. Can you see the car loan having an IBR% of 9.8%?
We take the car loan outstanding loan amount of RM 27,500 to consolidate it first
Then the next highest IBR% is Mr A Creditor – RM 69,300 which has an IBR% of 5.55%. We will settle this loan & consolidate it as the 2nd loan. Lastly, as you can see, the third-highest, it’s the Personal Loan at IBR% = 3%. The outstanding amount is RM 197,000.
So when you add up these 3 loans outstanding & instalment, can you see how we fit the most burdening loans into the new consolidated loan of RM 350,000. We still have an excess of RM 56,200 which we can’t use to settle the next highest IBR% of 1.77 which is the Company Loan (the outstanding is too high at RM 450,000).
|Outstanding Loan||Instalment Amount|
|RM 27,500||RM 2,710|
|RM 69,300||RM 3,850|
|RM 197,000||RM 5,921|
|Total||RM 293,000||RM 12,481|
From this calculation above, you can also see how we consolidate his total instalment of RM 12,481 per month to only RM 1,757 per month by using James’s existing housing loan.
You can use this calculator HERE (put in the interest rate of 3% & loan term 23 years). This effectively helps him to stop the ‘bleeding’ of RM 10,724 per month. So how do you make sense of this IBR%?
So this is the part which I want to share with you, how do we calculate your IBR%. Before I get you guys to calculate your own IBR% and for those of you that have a lot of loans, you can download the Debt Management Template”>Debt Management Template here to help you get a clearer picture.
To calculate your IBR%, you need 2 components:
This example above shows the current instalment amount for eg credit card repayment is RM 1,500 divided by the outstanding balance on the credit card for eg RM 15,000
So the IBR% will work out to 10% after you multiply it by 100
IBR% is mainly used if you’re in Category B. If you are in Category A, IBR% will be secondary because you are more concerned about saving interest first rather than instalment.
Start off by calculating your Car Loan’s IBR first. Next, calculate your Housing Loan’s IBR. Compare these 2 and you will get a sense of how burdening your ‘bad debts’ can be. Don’t take me wrongly. ‘Bad Debts’ here does not refer to those debts which have gone bad as a result of non-payment. What I mean here is how evil or notorious these ‘Bad Debts’ can be, after finding out their IBR%
Once you have completed the exercise above, I want you guys to do this exercise for the rest of your loans in your Debt Management Template to gain clarity on which loan is the most notorious & take steps to get rid of them quickly. So what if you also found out your most notorious debt is your Car Loan. Should you settle it off just like James?
I know what you are thinking. You must be calling me crazy to suggest James settle his car loan first since he already incurred the interest calculation upfront. Is like paying interest on interest. Why would you suggest that? In case you are wondering what are we talking about, head over HERE to find out the different types of interest calculation.
The reason why we did it & we are not suggesting everyone do the same. It is on a case to case basis. If you recall James’s case is that he is already in Category B – having an RM 18,000 monthly cash deficit. And the Car Loan happens to be one of the highest IBR% rates. So in order to keep him alive, he had to ‘bite the bullet’ of reducing his outflow quickly.
Of course, if you don’t have that urgency, you don’t have to settle your Car Loan like him. Just know the next time you are buying a new car, how to ensure it is not a notorious loan that sucks you dry, off your cash flow. There are ways to negotiate/structure your car loan to suit your personal circumstances. If you like to know more, do leave me a comment below
If this article helps you, do share this with 1 friend regardless of whether they are in debt or not.
*DISCLAIMER – All strategies listed here are not a recommendation nor advice. The article is written purely for the purpose of education and journaling only. The content of this article is an expression of my opinion and should not be taken as professional advice. If you are seeking professional advice, please consult me personally. You should do your own research and/or seek an expert’s advice when overcoming your debt circumstances.