Question: We seem to be at the end of our rope. We borrowed unwisely and to the max. We justified each purchase with ferocity only to find out in the end that the purchases were either untimely purchases or things that we simply could do without. Now our creditors are calling us every day, following up on our payments. Even if we pay a portion of our dues, they still follow up with us. We just want the hounding to stop and the stress to go away. Is there a way out of this mess?—Question posed during a one-on-one consultation by a PFA client who wants to remain unnamed
Answer: What do Greece, Italy, Ireland, Spain and the Philippines have in common? They were all at one point in a debt crisis.
To be sure, the tectonic plates of debt can drown you in a tsunami of financial woes. But before you run off to a corner to cry, take my advice: The first thing to do would be to smile.
And don’t wear a half-baked smile. Smile with both your mouth and eye muscles and, if you can, bundle your smile with laughter.
These things will produce the body’s natural muscle relaxant called endorphins. Once the endorphins kick in, you’ll be in a much better place.
The other reason why you have to smile is because the first person you should talk to is your creditor. People at the debt remedial departments of creditors are trained to be logical to the point of being emotionless.
But even the toughest of them will not be able to resist a genuine smile. And what is a genuine smile? It is one that involves both the mouth and eye muscles.
Trust me. It is easy for creditors to spot a fake or half-baked smile. Even a Mona Lisa smile will not sway them because it is not a full smile.
The University of Amsterdam came out with an emotion-recognizing software in August 2006 and ran the software on the Mona Lisa painting. They found out that at the time Mona Lisa was painted, she was only 83 percent happy, 9 percent disgusted, 6 percent fearful and 2 percent angry.
After you’ve got your creditors on your side with your smile, try asking for a restructuring of your debt. No less than the countries mentioned earlier went through the same process.
Restructuring involves recasting your debt through a longer amortization period so that your monthly payments become affordable. Even with interest of say 20 percent a year, the monthly payments on a P100,000 debt over 36 months (P3,716) become much more affordable than if paid over 12 months (P9,263).
As a rule in personal finance, your total monthly amortizations should be no more than 36 percent of your gross household income. If you had borrowed beyond this limit, then you may have already borrowed beyond your capacity to repay.
So, in our previous example, a P9,263 monthly amortization would require a monthly gross household income of at least P25,732 against just P10,323 for a P3,716 amortization.
With a sincere smile, you might be able to ask also for a reduction in loan interest. While prevailing interest rates will have a significant impact on the magnitude of reduction, any rate reduction will go a very long way. You could also ask for a condonation of a portion of (reduction in) your debt balance.
Another way to solve your debt problem is to refinance your debt. This means that you will have to find a new creditor to lend you money to repay your present creditors.
And if they are convinced that your problem is more of timing (lack of liquidity) than lack of capacity to pay (lack of solvency), they will gladly lend you the money to refinance your debt on longer terms and perhaps at even lower rates.
Moreover, if your refinancing strategy is able to cover all of your debts, you will have consolidated your debt to the point that you focus on only one amortization to only one creditor and on only one due date a month.
Just remember that repaying debts over longer periods of time can also lead to a larger amount of absolute peso interest. That is why you should save as much of the reduction in your monthly amortization so that you can accumulate enough money to prepay your refinancing debt as early as possible.
You’ve been to financial hell. You will be able to bounce back. But please, don’t fall into the debt trap again.
If you want to learn more about debt as well as cash, risk and wealth management, please visit www.personalfinance.ph. There are more free resources there for you to benefit from. You may also attend the EnRich™ personal finance training on Sept. 28 in Baguio City, Oct. 26 in Pasig City and Nov. 9 in Davao City. Details for EnRich™ may be found on the website.
Take it from Louis Armstrong: “When you’re smiling … the whole world smiles with you.”
(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-5050709 or e-mailed to firstname.lastname@example.org. To learn more about the RFP program, attend a FREE orientation on Sept. 19, 7 p.m. at the PSE Center. E-mail at email@example.com to register or text <name><e-mail><RFP> at 0917-3464126.)