How To Come Out Of Debt Trap?

They say, overdose of everything is detrimental and debt leveraging is not an exception. Amidst rising disposable income, ‘Debt Trap’ has emerged as the dark realty amongst growing middle-class Indians.  It just takes a few credit card bills, defaults on a personal loan/auto loan or so, to fall into the trap. Debt trap, if not handled properly, could mean severe financial setback and poor credit records making it impossible for you to take a loan in near future. But don’t despair if drowned by debt; follow these simple steps to bail you out…

Remember, there is no best way out other than paying it off. So your efforts must revolve around repaying it at the earliest and not just prolonging it. Also, debt re-payments will essentially enhance your debt raising capacity, whenever required.

You are in Debt Trap when……..

Resort to family & friends

Most people commit a blunder by not taking help of their family and peers for short-term borrowings. In most of the cases, your working brother or sister may share the burden of loan EMIs or your wife can avoid unnecessary household spendings to increase your affordability, and so on. In fact, you can also take friendly loans from your relatives or close associates. This option must be top on your priority as firstly, loans from close friends or associates are generally more lenient, i.e., low interest charges; and secondly, deal can be closed out informally without too much documentation.

If the amount rose through friends/ or close relatives is sufficient to pay off your total debt, you should work out a one-time-settlement (OTS) with lender. The process for this is as follows:

Approach the bank, list down all your loans without mentioning the names of lenders. This will give a fair idea of your total debt payable and corresponding proportion of debts toward him.  Express your desire for an OTS and negotiate for best settlement. Please note that while negotiating for OTS, you have an upper hand as banks always tries to minimize their Non-performing Assets (NPAs) and encourages OTS as long as they recover principal amount.

Loan restructuring

If OTS is not possible, ask the bank to restructure your loan. Here, it will help if you approach the bank with a clear picture of your current financial position and reasons for your defaults.  As per RBI guidelines, the bank must perceive the reason for default as genuine. If satisfied, banks may increase the loan tenure (not more than one year in most cases; in case of some types of loans, there is a cap on total tenure). By increasing the tenure of your loan, you can surely reduce your monthly outgo, but you will end up paying higher interest over incremental tenure. Hence, always retain the option of reducing the term, if your financial situation improves. However, this option is not available for credit card dues.

Swap your loan

Get a cheaper loan to dispose of costly ones. If you are servicing high-cost personal or business loan, try to avail cheaper loan in the foam of loan against property, loan against securities, loan against gold, etc., so that you will be able to pay your loans at lower rate. Few of the approved securities against which loans can be taken include your insurance policies, NSE, Kisan Vikas Patra, mutual funds, etc. In fact, NSC and KVP should be the first securities to be pledged as they are illiquid and by the time they mature, one can re-pay loans. Loan against securities are available at the interest rate of 11-15 per cent (according to current rate). Usually, banks allow loans at 50-60 per cent of the market value of securities. Few banks also offer loan facility in terms of overdraft wherein interest (usually 2-3 per cent) is charged only on drawn amount.  Loan against gold or properties are of similar nature and can be used to pay off costlier loans.

In case of jewellery loans, banks tend to charge interest of a few months in advance and then allow few interest-free months, giving the borrower a kind of breathing space that he desperately needs in a case of debt trap.

The prevailing interest rates for few of the PSU banks are given below:

Personal Loans vs Loan against Securities, Gold and Property

Credit Card Debt

Start with a costliest debt, that is, on credit cards. Check if you could negotiate the lower interest rate. It’s a realistic possibility as most of the credit card companies agree to negotiate, if they see better chances of recovery their dues. There are certain types of charges that issuers can waive-off. It includes over-limit, late payment fee, etc. You can pitch for the same while negotiating. From the banks’ perspective, it’s better to recover whatever comes their way than to have higher NPAs. You can ask your bank to convert credit cards debt into EMIs-based personal loan. This will reduce your interest costs to around 14-16 per cent against 36-42 per cent, which is there for credit cards on rolling over balance.

If you are having debt on multiple cards, consolidate your dues on the card you have minimum due, through balance transfer facility. To capture greater market share, banks offers balance transfer facility, wherein you can transfer the outstanding balance of one card to another. It typically allows a period ranging 3-6 months with low (no interest in few cases) interest rates, after which rates revert to normal. You can arrange a handy sum in between to pay-off this consolidated debt. Some offer this facility even before the customer asks for it, however, with others, facility is subject to mandated requirements. With this, you can convert the consolidated dues to EMIs and thereby reduce the interest outgo on consolidated credit card dues. Conversion of credit card dues into personal loan is another form of ‘Debt/Loan Swapping’.

If neither negotiation nor balance transfer works for you, you can apply for higher personal loan and repay consolidated credit card in full. However, the possibility of you availing a personal loan remains bleak, given that you are already grappling with heavy debt. However, there is no harm in giving it a try.

The Finishing Touch

Benefiting from above mentioned tactics, one can get out of debt trap; however, before you breathe free you must remove your name from the CIBIL defaulter’s list. The procedure is simple: After settling all the dues with lenders, procure the loan closure certificate and ask the individual lenders to make a request to CIBIL for removal of your name. Remember, your lenders have to initiate the procedure. After such request from respective lenders, CIBIL will remove your name from the defaulter’s name within a stipulated time, usually 1-2 months. After that, you can also check with CIBIL personally to ensure that the same is done. It’s also advisable to procure CIBIL credit report for your references.