Know your Debt

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Know your Debt

Prof. S. Thilak, Assistant Professor, Department of MBA, Sankara College of Science and Commerce

Understanding the debts.

            Before going to purchase any product, we need to think is this purchase using a loan necessary or can you save up and purchase it later. If we choose to go for the loan, than we have to consider the interest rate and other fee charges that has to be paid on the top of the principal sum and also we need to read the documents fully and carefully before signing. The document should not be signed if the terms conditions and repayment schedule is not understandable. Check the budget, how much is left for the debt repayments after meeting all your monthly expenses, borrowings and savings, Built-in some allowance so that expenses will be taken care, if suddenly expenses go up over that time. Do built-in some buffer if you have the floating rate loan just in case interest rates goes high. Make sure that all of you have sufficient savings to meet on going expenses and debt obligations. Every loan repayment must be paid in full, even if any personal circumstances change like loss of job or suffer a pay cut.

Think before to act as a guarantor

            The guarantor is person who guarantees to pay for some debt so, think before to act as a guarantor because it is a serious commitment. As you have to pay off the debt for the borrowers if he/she is unable to repay the debt and you may not be able to recover the money from the borrower in future and also you are liable for the future charges, legal cost , interest if payment is delayed, liable for all outstanding debts and future advances until the lender explicitly releases from obligations. The lender may take action against guarantor without taking action against the borrower. If a person is a ready to act as a guarantor remember that in worst case scenario are you ready to pay someone’s debt? So, think before to act as a guarantor.

What to do immediately when you are in debt

  1. List down all the lenders and persons that you have owed money.
  2. Indicate the total amount owed, if the debt is secured and whether any legal actions has been taken
  3. Prioritise the repayment of debts.
  4. Pay off the debts with the highest interest due first.
  5. Next pay off the debts with short grace periods before interest and late payment fees are imposed.
  6. Stop using the credit cards and credit lines immediately.
  7. Pay on time to avoid late fee charge or any more interest.
  8. Stick to the initial payment amount from day1 of repayment.

Do’s and Don’ts

  1. Take initiative to contact your creditors and seek help from them.
  2. Answer the creditor’s calls.
  3. Open, read and respond to the creditor’s mail.
  4. Make payment to your best ability while negotiating with the creditors.
  5. Pay off high interest debts first.
  6. Don’t use credit facilities any more
  7. Don’t assume that creditors will lose more by suing you to bankruptcy.

Options can take during in debt.

Lump sum settlement at a discount

  • Negotiate with creditors for a discount.
  • Raise fund through sale of assets, borrowing from cheaper sources.
  • Take a loan from insurance cash value but compare the loan interest rate first. Do note that the coverage will reduce or lapse if the loan is not been repaid back.

Self-administration

            Appeal for lower instalments through direct contact with creditors.

To conclude the information which is above said all related to an individual who lends money from different sources for different reasons. Lending money would be easy task but it gets difficult when the loan is not repaid . So, think before the action you do before lending the money. Calculate the income and expenditure of your own and plan your debt. You should be able to predict your future earnings and decide the life style according to it. If you’re lending a loan try to convert that loan into assets which would help you from insolvency. Always be ready with the plan B, because we do not know when the situation will change and when financial crisis happens like times in COVID-19.

Few points to avoid Debts

  1. Always go for a minimum rate of interest and short-term loan.
  2. If your desire to buy anything, try to save money for and buy it.
  3. Try to minimise your usage of your Credit Card.
  4. Follow the thump rule: After saving rest are expenses.

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