FOUR STEPS TO GET OUT OF DEBT (LOAN) TRAP

Now, if you have already taken a loan, and you lose your job. Or are facing a medical emergency. Or for whatever reason, you are unable to make the regular EMI payments.

Follow these 4 simple steps to come out of this debt trap:

Don't Panic:

Do not be harsh on yourself and do not react in an extreme fashion. Remember this is not a rare situation. Banks have customers who default on payments all the time. We understand it is a tough time for you but stay calm and find a practical solution.

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It might feel like you are alone, but you aren't. There's no need to feel like you have a great weight on your shoulders that you have to carry it by yourself. In fact, your bank will be the first entity willing to help you. Defaulting on your loan, even if it is a home loan, is not the end of the road.

Contact Your Lender And Keep Your Documents Ready:

Next step is to face the situation and contact your lender. Approach them and explain your current situation before matters get worse. Do not be scared and take charge of the situation.

Call the lender and set up a meeting to calmly and rationally discuss your options. 

And before you approach them create a file containing all your past EMI payment details, notices sent to you by the bank if any, details of the loan such as date of taking the loan, tenure, interest rate, EMI amount and so forth. Have this handy when you talk to your lender.

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Tell your lender the genuine reason(s) that have rendered you unable to pay the EMIs, state your intention to pay your loan back as soon as you can, and ask them what their options are.  

If you have clean past loan records which you cleared on time carry them along. This in a way will help you gain their trust about your intention to pay the loan.

Consider Your Options And Initiate A Dialogue With Your Lender:

If you have paid your EMIs on time until now, the bank knows you as a genuine borrower, and will take this into consideration when working together with you to find a mutually feasible solution.

'Genuine intent' to repay is the single largest thing that will work in your favour. Be sure to make it very clear to your bank that you do intend to repay and would like to work together to find a solution. 

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Genuine reasons that banks understand are loss of a job, illness, or an accident that may render you unable to work. You might also have multiple loans and find yourself in too much debt to handle.

Secondly, the bank is not keen to repossess your assets, it wants you to pay the money owed, or at least most or part of it. If you default, the bank's NPA ratio (Non-Performing Assets) goes up. This reflects badly on the bank's balance sheet. Also, they lose out on the money you would have paid them. So, the bank will much prefer to cut you a deal.

Wondering if the bank can repossess your asset i.e. your car or your home?

Legally, yes, they can. But there are a couple of reasons why you don't have to necessarily worry about this. 

Firstly, the repossession procedure in India (and in fact elsewhere in the world as well) is very lengthy and there are steps along the way where you and the bank can work together to come to a satisfactory deal. 

Here are likely options for you to settle your loan:

Refinance Your Loan:

Bank will restructure your loan if the EMI is too high, if there is increase in overall interest rates, or an increase in your personal commitments, or a combination of these factors and others.

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If you are currently paying Rs. 10,000 per month for 3 years, and this is too high, the bank might offer you an EMI less than Rs. 10,000 per month, for a little more than 3 years.

So, your EMI goes down, giving you some breathing room and the bank doesn't lose money because it will simply make it up from you over a longer period of time. Everybody wins on some level. 

Keep in mind that the payments you now make will eventually cost you more in terms of total money repaid. But this can be the breathing room you need. However, the extension in tenure will be small, so the change in your EMIs will also be small.

Grace Period:

May be the problem is not that you can't pay enough or  you can't pay at all. If you are in a position where you feel that within a few months your financial situation will change, you will get a job and be able to start repaying your loan a little bit at a time, perhaps at a lower EMI, then you can approach your bank for deferral of your payments.

The bank will grant relief, giving you a window of opportunity to calmly seek ways to increase your cash flows. 

Once the window closes, your EMIs will restart (on either the same terms or your new negotiated terms), but will include late payment penalties, known as Delayed Payment Charges. These charges are applicable for payments made after their due date.

In case some of your post-dated cheques (PDCs) have bounced due to insufficient funds, you will also be subject to cheque bounce charges.

Lump Sum Settlements:

This is something that for obvious reasons might not be feasible for a home loan, but it can work for a personal loan, credit card debt, or a car loan.

On a case to case basis, banks are sometimes willing to go for one time or lump sum settlements of outstanding dues.

They will waive some of the charges or some of the amount and charges, and you can pay the rest as a loan settlement. However, this is detrimental on your credit score.

Getting a loan in the future, if you want one, will become either very difficult or very expensive, or both. 

(If you are clueless about credit reports, here is All You Need To Know about credit report) 

Liquidate your investments:

Liquidation of assets can be your last resort.

If none of the above options works, then you can liquidate your investments to service your debt. You can liquidate your deposits or mutual funds to pay EMIs.

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On the other hand, you can also use this amount to make part payments of your principal amount.

Use PersonalFN's EMI Calculator to calculate your monthly EMIs now.

What happens if you still can't pay EMI? 

At this stage, your bank will seek repossession of the asset. The asset will be auctioned off within 15 days (for a movable asset like a car) or 30 days (for an immovable asset such as a home). During this period, you still have the option of buying back your own property provided the funds are available to you. 

At no time during the process will the bank not give you the option to pay, in bits and pieces or via a reduced lump sum and maintain possession of your asset. 

Here are additional steps you can take to manage your finances during a crisis, apart from negotiating with the creditors...

• Reduce your expenses
• Find additional sources of income
• Make a list of your assets
• Sell unwanted items
• Consult an expert

To live a healthy financial life, make sure you:

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• Maintain sufficient contingency reserves
• Don't fall into a debt trap
• Have adequate life and health insurance
• Undertake financial planning

i hope this article helps you to plan your loan repayments. Take a look before you