What to do if there is no money for EMI?

Loans | admin | September 3, 2011 at 8:49 am

LAYOFFS have been the dreaded word of this year. Many employees were asked to leave without any notice. The rude shock, however, is to wake up to your piling debts (home loan, pending credit card payments, personal loans, car loans) and no source of income to pay up. Many had to tap into their savings for everyday survival.

In such situations, there are several credit counseling centers to help find a solution for your dilemma. They are governed by a model scheme for Financial Literacy and Credit Counseling Centers (FLCC), put in place by the RBI.

What do credit counseling centers do?
These centers help you restructure your finance to help you survive this sudden reversal of finances. Though these centers have been initiated by banks, they are intended to provide neutral counseling free of charge. So, they act as an intermediary between the banks and the individuals in distress.

What are the steps a counseling center undertakes?
Step 1: Check your credit status
Before a counseling center takes up your case, they first determine if you are indeed mired in steep debt without a solution in sight. A credit counseling center establishes this fact even before they start providing the counseling. They track down the entire financial history of the individual with the essential supporting documents that testify this plight. A person's credit history is also a good record of his financial transactions.

Step 2: Advice you
After the center has established that you are indeed short of funds and they can vouch for a dead end in your repayment status, they take up your case. The counselors are usually retired bank employees who sit with you to find a solution. They advice you on how to approach a bank and what to take to the negotiation table. Banks can, sometimes, be co-operative and agree to wait till the individual finds another job. Some banks also agree to a waiver of interest in dire cases. They also accept whatever payments are possible and write off the debt.

What are the restructuring options they suggest?
The first step is to put the entire financial history of the individual on paper. His net worth is calculated based on the assets he owns, the investments he has made and his current list of debt liabilities incurred. Then an analysis is undertaken to bring existing costs down using the most suitable method that is viable.

Here are some suggestions for debt restructuring:
1. Possibility of liquidating some of the assets to pay off the debts like credit card dues, which will keep gaining interest over a period of time.
2. Possibility of making part payments towards the loans to bring down the interest cost.
3. Converting a heavy credit card payment into a personal loan. Compared to credit card interest rates, personal loans are a cheaper option . Hence, such a move can at least bring down the cost of interest of the debt if it is not possible to completely remove the debt from the picture.
4. There is an option of taking a loan against securities like Public Provident fund, if he has been employed for more than five years, or other securities like a gold, jewelery, art, life insurance policy etc.
5. Loan Against Property (LAP) is also a good option, where loan is taken against the value of the property.
6. The center counsels individuals regarding avoiding such financial trouble in future and asserts the need for savings and budgeting. These centers also advise the individual on the evaluation of various products offered by banks and insurance companies.

Source: moneycontrol.com