IF you don’t have super rich parents or inherited a lot of money, chances are high that you will take out some kind of loan, installment plan, or mortgage to make important purchases.
But payouts could be a nightmare during this Covid-19 pandemic, especially for those who have lost their jobs or been forced to cut wages.
Indeed, many have financial difficulties and are forced to make difficult choices. It can be emotionally draining.
Fortunately, the government has urged banks to be more lenient by offering leave or a moratorium on repayment.
The latest Targeted Loan Assistance (TRA) system allows the B40 group and those who have lost their jobs to choose a three-month loan moratorium or cut monthly payments by 50% over six months.
This moratorium is not automatic. Several banking groups came to help their borrowers.
“The TRA enhancements will enable affected customers to go through a simplified application process and receive automatic approvals within a short period of time,” said RHB Banking Group Managing Director / Group CEO Datuk Hayrusaleh Ramley.
Creador Foundation senior program manager Shobana Sivanendran says borrowers need to understand the impact of the moratorium on loan terms, as different banks may have different arrangements.
When times are tough, the food on the table far outweighs the loan payments.
But a loan is a loan. Sooner or later it will need to be paid.
If you are not making a loan, try to catch up.
Apart from interest and the effect of compound interest, other consequences can be serious and your creditworthiness can be compromised.
Your creditworthiness determines your ability to borrow new loans.
“Any debt problem can be solved, even if it may not be easy. This requires you to make a plan and stick to it, ” said the expert.
The report says that if your plan is to get out of debt before the due date, there are two different strategies for resolving outstanding balances, known as the “debt avalanche” and “debt snowball” methods.
These methods apply to consumer loans, auto loans, loans to individuals, credit cards, and other types of loans.
To do this, you need to list your debts first. Rate them from the highest interest charges – mainly on credit cards and personal loans, to the lowest and largest debts – to the smallest.
The report says that you are required to make a minimum payment for all but one. You pay extra money to pay off debt at the highest interest rate, and this is known as the avalanche debt method.
Shobana said that paying off loans at the highest interest rate will help you reduce the likelihood that you will have to pay more interest.
In the current low interest rate regime, try renegotiating to lower rates.
Regarding the debt snowball method, Shobana said that you pay off your smallest debt first and then move on to the next one, regardless of the interest rate.
“If your first debt repayment is RM100 per month (with this in mind), you are paying off your second debt, which is RM150 per month, try paying MYR 250 per month instead,” she adds.
Thus, you speed up the repayment of your second debt.
To get out of debt, you need to cut your spending and keep a close eye on your spending. Prioritize the essentials and don’t let your bills grow faster than you can pay them.
Is it better to just take out a larger loan to pay off all outstanding debts?
You can do it. But check the interest rates on the new loan to see if they are lower than on the existing loan.
“Keep in mind that a lower interest rate can make your monthly payments more affordable. But that could mean extending the maturity (because you are taking out a new loan), ” Shobana said.
You have to make sure you can afford to pay it off, or else you could fall into the trap again with “late fees or missed payments.”
If you don’t pay off your loans on time, your lenders can file for bankruptcy. Avoid this at all costs, it will ruin your life and affect your credit score. Instead, talk to your creditors and keep negotiating to reach the most affordable repayment terms.
If you are unable to manage your debts on your own, seek help from recognized agencies that can help you draw up a debt management plan.
Make sure you are contacting a reputable organization and not an unauthorized agent who claims to represent financial institutions.
The Credit Counseling and Management Agency or AKPK offers borrowers free advice and guidance, including debt restructuring options.
There are other agencies, including the Creador Foundation, which through Multiply provides financial literacy education for low- and middle-income adults.
Whatever your financial situation, take the time to analyze it and protect your creditworthiness. Your goal should be to get out of debt sooner rather than later.