By Hema Moryani

Basics of Debt They are contracts in which one party lends money to another at certain pre determined terms Rate of Interest Tenure Interest payment Schedule They may be referred to as gilts, bonds, debentures

Basics In times of economic boom Salaries rise Spending rises Lifestyle changes This gives rise to personal borrowings Loan by individual – housing loan, personal loan, education loan, credit card

Type of borrowing Good Borrowing The generate an asset Leads to income Bad Borrowing Splurge on luxury that cannot be afforded Depreciating assets Higher interest rates

Types of loan Secured loans Mortgages Any other asset, gold, securities Unsecured loans Personal borrowing Credit cards

What leads towards a debt trap Excessive borrowings High interest rate borrowings Borrowing of money at higher rate to pay off a low rate loan To improve liquidity

Debt consolidation Borrow at a cheaper rate to pay of higher interest bearing loan Consolidate all unsecured loan against a secured loan

Debt Consolidation To give up several loans and take one loan Ascertain the period you would like to repay the loan Rate of interest Amount to be repaid according to the available liquidity to avoid defaults.

Debt Settlement or Debt Relief Debt settlement or Debt relief or bankruptcy Helps in reduction in the interest rates or Settlement worked up to payoff a large lump sum

Debt forbearance Where the lender gives up the interest portion but the principal repayment is maintained

Debt Restructuring Refers to the reallocation of resources or changes in the terms of the contract General Restructuring Works to the benefit of both the debtor and the creditor Would normally refer to the extension of the repayment or lowering of interest rate

Debt Structuring General Restructuring Existing debt is replaced by a new debt Where the interest rates may be altered The tenure may be postponed

Debt Restructuring Troubled Restructuring The creditor(lender) incurs some loss He may have to give the accumulated interest amount Dip in the collateral security Conversion of loan to equity

Debt To Income Ratio (DIR) Monthly Income Rs Type of loanEMIPercentageIdeal limits Personal loan50005% Vehicle loan % Credit card % Total40000 Percentage(Exclu ding Mortgage) 40% 30-35% Mortgage EMI %20-25% Total Percentage65% %

Debt To Expense Ratio Income Rs.1,00,000 Household Expense25000 Education Expenses7500 Personal expense5000 Other expense (petrol etc)5000 Total expenses42500 Percentage to income42.5%

Using the DIR Method Target those debts for faster pay offs that have a biggest impact on the income ratios Take the mortgage loan and try to re- structure the loan Review the budget in the areas to reduce spending and to create savings

Dealing with credit cards Debt Snowball Method List all the credit cards CARD 1CARD 2CARD 3TOTAL AMOUNT MINIMUM PAYMENT Other payments 10870

Remember !! Borrowing cost money Never borrow what you cannot repay Never borrow for luxuries when you cannot afford necessities Prioritize your borrowing Reserve some borrowing capacity for emergencies