Liberate yourself from loans

Debt counseling: Sloppy credit assessment, the availability of easy credit, and a low level of public awareness about the financial implications of credit options are making indebtedness serious concern. Throw in the increasing preoccupation with an affluent lifestyle, and the scenario gets bleaker. Many also borrow to speculate in stocks, realty and even to outright gamble.

People are used to a 20-25% increase in annual income. But what happens if there is a slow down? Over commitment can get you in trouble. The entire family might pay the price through domestic disharmony.

This is why debt counseling a common service in the developed world has become an urgent requirements in India. Fortunately, a few services have opened their doors, and are guiding borrowers and offering restructuring solutions, bank of India’s services.

Initiatives by Union Bank, Dena Bank, UCO bank and Bank of Baroda have a rural focus.

More such services are likely in the wake of a concept paper published in April 2008 by the Reserve Bank of India advocating financial literacy and credit counseling centers.

Counseling services don’t add to an already beleaguered borrower’s financial burden: their services are free. Banks offer these services as a goodwill gesture say the counselors adding it is a corporate social responsibility initiative.

Debt counseling centers offer advice for all categories of credit namely credit cards, personal loans, home loans and so on. Their services are creditor neutral that helps you out no matter what institution you borrowed from.

Most borrowers learn about debt counseling through the internet. The Websites of Disha and Abhay give contact information for their offices in several cities. If there is no center near you, they may help you by phone or email.

If you must get into debt, do so with care. The best strategy is don’t pay the minimum due on your credit card; pay the full amount each month. Don’t take an expensive loan to pay off a previous loan. If you have more than one loan, pay off the most expensive one first. So it makes sense to pay off credit cards, then personal loans, then lower interest debts. If you must borrow do so against a security such as property or shares. Such loans (14% to 16% interest) are cheaper than personal loans (19% to 21%). and lastly, if you can borrow from helpful relatives to pay off your debt, do so.

Debt counselors make a holistic assessment of your situation, and give you an appraisal of the costs involved, interest rates, fees, all the fine print. For instance, credit cards are the most expensive kind of debt, with annual interest rates of 42% to 49.36%. When you add the charges they work out to more than 50%.

The next step is to list payments that you, the borrower, can make dues, equated monthly installments and so on. The center can help you request creditors to restructure loans. So, for instance, you may end up with a longer repayment schedule but more affordable EMIs. A Mumbai executive negotiated repayment at 8% simple interest over 36 months.

It is a win-win situation for banks and customers. Banks avert a messy recovery process, and get at least the principal back. And borrowers get help paying off dues. All of this though applies only if a bank is convinced the borrower is truly willing to repay and genuinely cannot stock to the original schedule. It (the initiative) has been able to discern people facing genuine difficulties from intentional defaulters.

Debt centers concur that banks attitude towards creditors has softened and many choose to cooperate with the debtor.

The borrower then has to list movable and immovable assets, such as real estate, shares mutual funds and gold. It may be necessary to take hard steps like selling gold and vehicles to reduce liabilities. Gold prices normally rise 10% to 14% annually. Last year’s 40% rise was exceptional whereas personal loan interest rates are 18% to 21%. Getting rid of non-productive assets to pay of loans makes financial sense.