Financial planners and bankers point out that poor credit management is becoming a common occurrence. Currently, gross domestic savings is at 30 percent of the gross domestic product. But an increasing number of families are going in for easy credit without looking at the repercussions.
Why debt counselling?
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 a 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 percent increase in annual income. But what happens if there's a slowdown? Over commitments can get you in trouble. The entire family might pay the price, through domestic disharmony. This is why debt counselling - a common service in the developed world - has become an urgent requirement here. Fortunately, a few services have opened their doors, and are guiding borrowers, and offering restructuring solutions.
Advantages
Counselling services don't add to an already beleaguered borrower's financial burden - their services are free. Banks offer these services as 'a goodwill gesture’; It is a corporate social responsibility initiative. Debt counselling centres offer advice for all categories of credit - credit cards, personal loans, home loans, and so on. Their services are creditor-neutral, that is, they help you out no matter what institution you borrowed from.
How to get help
Most borrowers learn about debt counselling through the Internet. A source of online help is www.money4you.in. This is an initiative of the Indian Banks' Association (IBA), India Cards Council and Mastercard, and this site offers free financial education.
How it works
Debt counsellors make a holistic assessment of your situation, and give you an appraisal of the costs involved - interest rates, fees, and all the fine print. For instance, credit cards are the most expensive kind of debt, with annual interest rates of 42 to 49.36 percent.
The next step is to list payments that you, the borrower, can make - dues, equated monthly instalments, and so on. The centre can help you request creditors to restructure loans. So, for instance, you may end up with a longer repayment schedule but more affordable EMIs.
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 stick to the original schedule. Debt centres 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 percent annually - last year's 40 percent rise was exceptional - whereas personal loan interest rates are 18 to 21 percent. Getting rid of non-productive assets to pay off loans makes financial sense.
Borrowers may be advised to postpone lifestyle expenses like leisure travel, expensive gadgets, cars, and eating out too often. Painful, maybe, but sometimes the alternative is worse. The last, and most productive, option is to increase one's income.
The best strategy
If you must get into debt, do so with care.
Why debt counselling?
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 a 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 percent increase in annual income. But what happens if there's a slowdown? Over commitments can get you in trouble. The entire family might pay the price, through domestic disharmony. This is why debt counselling - a common service in the developed world - has become an urgent requirement here. Fortunately, a few services have opened their doors, and are guiding borrowers, and offering restructuring solutions.
Advantages
Counselling services don't add to an already beleaguered borrower's financial burden - their services are free. Banks offer these services as 'a goodwill gesture’; It is a corporate social responsibility initiative. Debt counselling centres offer advice for all categories of credit - credit cards, personal loans, home loans, and so on. Their services are creditor-neutral, that is, they help you out no matter what institution you borrowed from.
How to get help
Most borrowers learn about debt counselling through the Internet. A source of online help is www.money4you.in. This is an initiative of the Indian Banks' Association (IBA), India Cards Council and Mastercard, and this site offers free financial education.
How it works
Debt counsellors make a holistic assessment of your situation, and give you an appraisal of the costs involved - interest rates, fees, and all the fine print. For instance, credit cards are the most expensive kind of debt, with annual interest rates of 42 to 49.36 percent.
The next step is to list payments that you, the borrower, can make - dues, equated monthly instalments, and so on. The centre can help you request creditors to restructure loans. So, for instance, you may end up with a longer repayment schedule but more affordable EMIs.
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 stick to the original schedule. Debt centres 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 percent annually - last year's 40 percent rise was exceptional - whereas personal loan interest rates are 18 to 21 percent. Getting rid of non-productive assets to pay off loans makes financial sense.
Borrowers may be advised to postpone lifestyle expenses like leisure travel, expensive gadgets, cars, and eating out too often. Painful, maybe, but sometimes the alternative is worse. The last, and most productive, option is to increase one's income.
The best strategy
If you must get into debt, do so with care.
- 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 percent interest) are cheaper than personal loans (19 to 21 percent).
- And lastly, if you can borrow from helpful relatives to pay off your debt, do so.
