Charming your way out of past due debt

Question: Is it advisable to borrow from relatives to help me pay off my past due debt? Answer: Debt is death to those who abuse it. But what are you to do if you find yourself buried under a ton of debt?

The last thing that you should do is to frown to the point of making your eyebrows appear like they are shaking hands. On the contrary, the first thing that you should do is smile! You need to smile not so much to deny the presence of your debt problem but more to summon the strength and resolve to attack a tough one. The act of smiling is nature’s pain killer and muscle relaxant. Smiling allows people to calm their emotions and to think more clearly. However, you need to smile honestly and profusely. In other words, you should smile with your whole being. Many times, this honest and profuse smile is manifested in smiling with your zygomatic major and orbicularis oculi muscles, which is smiling with your mouth and your eyes.

Consider the Mona Lisa, the painting of the person with world’s most famous smile. If you look closely at Mona Lisa, she will appear to display only a half smile. In fact, the University of Amsterdam ran an emotion recognizing software on Mona Lisa and found that she was only 83 percent happy while being 9 percent disgusted, 6 percent fearful and 2 percent angry. That kind of smile will get you nowhere when negotiating with your creditors. So sport a full and honest smile when you find yourself deep in past due debt. Of course, smiling is just the start. Immediately after developing the proper disposition, you should begin to buckle down to solve your debt problem.

The basic solution to solving past due debt problems is through restructuring or the rescheduling of loan payments under terms and conditions acceptable to both lender and borrower. Past due debt is usually the result of a mismatch between the borrower’s cash inflows and outflows. How the borrower got to that point is a different discussion altogether. The immediate challenge is to get the overdue debt paid over a short period of time (e.g. like with credit card debt). Restructuring will allow you to repay your debt over a longer period of time and hopefully at a lower interest rate with some condonation of penalties, interest and even a portion of past due principal. As a rule of thumb, however, you should restructure your debt over the shortest time possible while still being affordable to you in terms of amortization level.

The other way to solve debt problems is to refinance by borrowing from others to pay off existing debt, and with the refinancing loan being spread over a good number of years and at a lower interest, especially if there is collateral offered. Most lenders, however, offer such loans only to nonpast due borrowers. That is why it is important to be aware of looming problems with debt repayment and to nip the problem in the bud by getting refinancing loans before such current loans fall past due.

The beauty of refinancing is that you can consolidate all your current debts under just one creditor with only one amortization amount and one payment date per month to worry about. On the assumption that your credit standing is still good, consolidation can be facilitated by the balance transfer facilities of your credit cards, getting a home equity loan or line, or even borrowing against the cash value of your life insurance (assuming it is sufficient).

In consolidating debt, just be aware that some creditors use “add on rate” or AOR in computing interest. The monthly interest is fixed and is equivalent to the quoted monthly rate as applied to the original loan amount. The amount of monthly principal repayment, which is added to the monthly interest payments, is computed by simply dividing the original loan amount by the term of the loan. To compute the effective interest rate, just use the following formula in MS Excel: “=rate(nper,pmt,pv,)” where “nper” is the number of payments usually in months, “pmt” is the periodic payment or loan amortization and “pv” is the total amount of loan to be consolidated under one creditor. Shop around for the best debt consolidation terms.

Sometimes, consolidating debt will not be enough. This is when you may need to augment your debt reduction strategy by selling some assets like that third TV and cutting back on expenses like your video streaming service subscription.

You may also try to augment your income through a business. But this action step needs to be well thought of as going into business is a long-term solution as income is hardly immediately generated. In the meantime, a business will need both startup and permanent working capital. To succeed, a business also needs 100 percent attention.

As a very last resort, and in answer to your question, you can borrow from relatives at concessional rates and repay over longer periods. But mind you that such loans can create stress in family relations. That is why it is all the more important to put everything about such loans from relatives in writing. The irony of it all, however, is that relatives tend to disappear during such times of need.Lastly, stay debt-free. You’ve been through hell and back. Do not fall into the same hole again. INQ

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