Debt’s all folks

Question: I wake up every morning with a heavy heart and a mind that won’t stop worrying. You see, I owe a sizeable amount to a number of lenders. I started with just one.  But soon after, I found myself borrowing left and right. And because I could not pay even one, I resorted to borrowing from another but at a higher interest rate. Now I can’t pay my debts and collectors are hounding me, threatening to bring me to court and expose me to the HR department of the company I work for. Can you help? (from “Ask a friend, ask Efren” free service available at www.p ersonalfinance.ph and Facebook)

Answer:  Giving you the immediate possible solutions to your debt problems also requires me to help you find out the root causes for such problems. But since we have limited space for this article, let’s just focus on solving your pressing need of getting out of debt first.

The two most common options are to refinance and to restructure your debts. Refinancing involves getting a new loan to repay your old ones.

It would be great if you could just find one loan to repay all the old ones because you would be consolidating your debts under one creditor with just one repayment date and amount to remember.

Restructuring, meanwhile, involves changing the terms of your loans with your existing creditors to lead to an affordable repayment. Such terms could be one or a combination of: a longer repayment period, lower interest rates, condonation of interest and penalties (if any) or reduction of the principal balance.

Now, if you are still current with your creditors and have collateral to offer, ideally real estate, you could get a collateralized (consumer) loan from a new creditor to pay off your existing ones. Your collateral will afford you a higher loanable amount, lower interest rates and longer repayment periods.

Do remember, however, that lenders still want their money back, plus interest, and not real estate. Therefore, their overriding consideration will still be your capacity to repay.

Don’t be whimsical

Also, get only the loan you need and not a centavo more.  If you borrow more than what you need, you may end up whimsically spending the extra loan proceeds.

And whatever cash flow savings you get from the resulting lower monthly loan amortization, religiously save the difference in an account that you can eventually use to prepay your loan.  This way, you can also save on interests on your new loan.

Just a note on prepayment. Apply for a collateralized (consumer) loan from a lender who does not charge prepayment penalties as prohibited by the Consumer Act of the Philippines (Republic Act 7394). The prepayment penalties are sometimes called prepayment loan processing fees.

Prepayment of loans

In fact, the law even says that prepayments of consumer loans can be done at any time. There is no mention of loan advance payments or prepayments being limited to loan availment anniversary dates.

If you do not have collateral to offer but are still current with your creditors, you can avail of another noncollateralized personal loan to repay your current ones. But avoid refinancing low interest rate loans with those carrying higher interest rates as this strategy will only dig a deeper debt hole for you.

Take note as well that personal loans are usually quoted on a seemingly much affordable low add-on-rate (A-O-R) basis per month. The effective annual rate is not derived by simply multiplying the monthly A-O-R by 12 months as interest on such loans is not computed on a diminishing principal balance basis. Instead, monthly interest is equivalent to the A-O-R multiplied by the original loan balance (always).

The Bangko Sentral ng Pilipinas compels credit card companies to book as loss those credit card receivables that have been outstanding for longer than 180 days.

Debt collectors

If you have credit card payables in this category, you will probably already have external collection agencies (ECAs) hounding you and that your name has fallen into the negative file information system, making it difficult for you to borrow in the future even if you had already repaid your past dues.

The only good news is that, in this kind of situation, you can ask for condonation of interest/penalties and perhaps even a reduction in your principal balance. You just have to show your lenders through their appointed ECAs that you really do not have the means to repay your outstanding loan balances as they originally stand.

And you have to be patient as the process of negotiating will take time. After all, the marching orders of ECAs are to collect as much as possible.

One last piece of advice, know that life is too short to be spent just worrying about debts.

To help you find the root causes of your debt problems, visit our website at www.personalfinance.ph for free tools. You can also check out our EnRich™ Getting Out of Debt or GOOD program (www.personalfinance.ph/good.html) where we assist people with their debt problems through refinancing (from a third party lender) and counseling.

(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, seasoned investment adviser and best-selling author. Questions about this article may be sent by SMS to 0917-505-0709 or e-mailed to [email protected]. To learn more about investment planning for retirement, attend the 55th RFP program on July 30-Sept. 17, 2016. For more details, inquire at [email protected] or text <name><email><RFP> at 0917-9689774.)