FALLING behind on your loan payments can easily cause sleepless nights – if not nightmares, when pondering the thought that the home you have or car you own could be repossessed at any time.
There is no simple solution when you’re faced with growing debt, especially those that you’re struggling to settle.
However, there are options available when you’re having problems repaying your loan.
Paying the minimum
If your credit card debt’s been piling as of late, then making minimum monthly payments is the least that you can do – but in the long term, it’s not going to settle your problem, says Success Concepts Life Planners chief executive officer Joyce Chuah.
“Repaying the minimum won’t get you out of credit card debt as it could take years to repay the loan in full.
“If you have a credit card debt of RM10,000 and only repay the 5% minimum each month and the interest is 17.5% per annum (which is the maximum credit card interest charged; if you are prompt in payments for the 12 consecutive months, then it falls to 13.5% per annum), you will only repay the total debt in full only after 88 months – chalking up extra interest charges of RM3,896!”
Should you get a loan to repay your debt
Chuah believes this is an option, but there are others of course.
“As long as the new loan interest rate is lower than the credit card interest rate. Many other loans qualify. Just never go to the Ah Longs.”
Chuah says one should find other ways to supplement one’s income to help settle one’s debt.
“Can you earn more? Do you have a skill or hobby from which you can earn a new stream of income? Can you be more frugal? There are many ways to cut down on personal expenses. We usually don’t because we don’t scrutinise our daily habits.
“Check if you can take out any equity from your home? Some may have a home loan and the OMV (open market value) of the loan has risen and hence there may be an opportunity to refinance the loan and obtain an overdraft (OD) tied to the loan. Usually the OD has a rate as attractive as the home loan.”
Chuah adds that using a low interest rate loan (like the OD) to repay a high interest loan (like the credit card) is prudent and can help save a person thousands of ringgit.
Another option is to sell liquid assets to repay the credit card debt, Chuah suggests.
“Do you own stocks, unit trust funds, even insurance plans that you can raise cash from to repay the debt. This is so long as the liquid assets cannot return you more than the 17.5% interest that the credit card charges you.
“There is no point keeping an asset growing at 8% per annum while at the same time you are charged twice the amount by your credit card company. The net effect on your money is negative.”
One could also try contacting the bank to restructure the loan.
“They will be willing to help when you are willing to negotiate and repay your outstanding balances. Also, one could also try borrowing money from a trusted friend and/or family member. Pay them back in kind (akin to interest payments) in terms of your time, energy or skills where they need it most.”
Review and adjust
If you’re falling behind on your vehicle repayments, contact the lender to renegotiate the terms. However, before doing that, it’s best to review and adjust current budget plan, especially in terms of reduction in expenses, says Standard Financial Planner Sdn Bhd’s Jeremy Tan.
“This is so as to cover the shortfall of the instalment amount. Also, it is always good to be practical and to inform the bank on the inability to service the loan and renegotiate the terms, such as extending the tenor and hence a lower repayment amount.”
Selling off the vehicle
Selling off your vehicle to pay off the loan is an option, provided of course that the value of the car is worth more than the loan sum outstanding.
“However, if the market value of the car is lower than the amount owing, it may not necessarily pay off the balance of the loan, but it is an option to be explored. At least with a substantial portion paid off, the balance to be paid will be in monthly instalments and would be less.”
Letting the car get repossessed
Tan believes that repossession is not a viable option.
“It may incur more cost and affect an individual’s credit rating, or capacity to borrow in the future for other mortgages.”
He notes that by having the car repossessed, the legal cost borne by the bank will be imputed to the borrower, which includes repossession fees that are either charged or levied.
Renegotiate the loan terms
If you’re struggling to repay your property loan, a viable option would be to contact the bank as soon as possible and have the terms renegotiated, advises MyFP Services Sdn Bhd managing director Robert Foo.
“Yes it is definitely possible. Many times it is not advantageous to the lender to go for legal foreclosure. They would prefer to restructure the loan with you if that can be done,” he says, adding that foreclosure will have an impact on a person’s credit score.
Consider renting/selling the property for profit
Foo considers this an option but adds that it is something that should be well-thought off first.
“Well this is a question that needs a comprehensive answer. If you cannot repay the loan, is it because your income generation has been affected or some other liquidity event has impacted you temporarily. We would have to look at what other options you have to resolve the liquidity issue within the short term and what are some possible long-term solutions.
“Yes, it could involve renting the place out or selling the property if that seems to be the best option. But we have to look at the issue in totality based on the client’s actual circumstances.”