UNLESS you have super rich parents or have inherited lots of money, the likelihood of you taking some kind of loan, hire-purchase or mortgage facility to make important purchases is high.
But repayments can be a nightmare during this Covid-19 pandemic especially for those who lost their jobs or had to take pay cuts.
Indeed, many are struggling financially and have to make tough choices. Emotionally, it can be draining.
Fortunately, the government has urged banks to be more lenient by offering a repayment holiday or moratorium.
The latest targeted repayment assistance (TRA) allows the B40 group and those who lost their jobs to opt for a three-month loan moratorium, or reduce monthly installments by 50% for six months.
This moratorium is not automatic. Several banking groups have come forward to assist their borrowers.
“The enhancements to the TRA will enable affected customers to go through a simplified application process and obtain automatic approvals within a short period, ” said RHB Banking Group managing director/group CEO Datuk Khairussaleh Ramli.
Creador Foundation senior programme manager Shobana Sivanendran says borrowers need to understand the impact of the moratorium on their loan terms as different banks might have different arrangements.
In trying times, putting food on the table far outweighs loan repayments.
But a loan is a loan. Sooner or later it needs to be paid.
If you have fallen back on your loan repayments, try your best to catch up.
Apart from interest and the compounding interest effect, other consequences can be severe and your creditworthiness can be compromised.
Your creditworthiness determines your ability to take on new borrowings.
“Every debt problem can be managed, even though it may not be easy. It requires you to make a plan and stick to it, ’’ said an expert.
If your plan is to free yourself from debts sooner than the stipulated tenure of your loans, there are two distinct strategies to settle outstanding balances known as the “debt avalanche” and “debt snowball” methods, a report said.
The methods apply to consumer, auto, personal loans, credit cards and others types of loans.
To do that, you need to first list your debts. Rank them from highest interest charges – mostly credit cards and personal loans to lowest, and, largest to smallest debt.
You need to make a minimum payment on all except one, the report said. You pay extra money to settle the debt with the highest interest rate, and this is known as the debt avalanche method.
Shobana said paying off your loans with the highest interest rate will help you reduce the chances of having to pay more interest.
In the current regime of low interest rates, try to re-negotiate to bring down the rates.
For the debt snowball method, Shobana said you pay down your smallest debt first, then move to the next, regardless of the interest rate.
“If your repayment on the first debt is RM100 per month, (with that settled), you repay your second debt, which is RM150 a month, try to pay off RM250 a month instead, ’’ she adds.
With that, you are accelerating the repayment of your second debt.
To pay off your debts you need to trim your expenses and be mindful of your spending patterns. Prioritise your essentials and don’t let your bills grow faster than you can pay them.
Is it better to just take on a bigger loan to settle all outstanding debts?
You can do that. But check the interest rates of the new loan, and if it is lower than your existing loans.
“Be aware that a lower interest rate could make your monthly repayments more affordable. But it might mean prolonging your repayment period (because you are taking on a new loan), ’’ Shobana said.
You have to make sure you can afford to repay it or again you may fall into the trap of having “being charged penalties for late or missed payments.’’
If you do not settle your loans timely, your lenders can file for bankruptcy. Avoid this at all costs, it disrupts lives and affects your credit score. Instead, talk to the lenders and keep negotiating to reach the most affordable repayment terms.
If you are unable to tackle your debts by yourself, do seek help from recognised agencies that can help you come up with a debt management plan.
Make sure you go to a reputable organisation and not some unauthorised agent that claims to represent financial institutions.
The Credit Counseling and Management Agency or AKPK offers free advice and guidance to borrowers including options for debt restructuring.
There are other agencies, including Creador Foundation, which provides financial literacy education for low and middle income adults via Multiply.
Whatever your financial situation may be, take time to review it and safeguard your creditworthiness. Your goal should be to set yourself free from debt rather sooner than later.