Keep an eye on your credit count to avoid a debt trap

THERE seems to be no end to the global market meltdown. Though central banks have announced rate cuts, the markets don't seem to recover. Experts are of the view that the world may be entering a long recession. This means that the era of cheap loans are all but over.
    As an individual, there seems to be no better time to carry out your credit evaluation. Before charting out your plan of action, it's important to know if you have a problem.
The early warning signs
Know your credit limit: Kartik Jhaveri, director Transcend India and a certified financial planner says: "If you are spending 30% of your take home salary to pay off some debt (excluding home loans) you have a problem." Usually, lifestyle and other home expenses aggregate to 40% of your take home salary when the inflation is less than 10%. Now, you could be spending almost 50% of your salary for the same things. In such a scenario, it's better you control your finances.
    In case of home loans, as you pay EMIs, you gradually earn an asset. At a future date, you will own an asset which will earn a decent return over and above the cost you have incurred on the property, Mr Jhaveri adds. We take loan either to create an asset (like buy a house of property) or meet a consumption need. In case of an asset creation, the loan typically comes at a low cost as it's a security backed loan. In case of an unsecured loan like a personal loan or a credit card, it burns a hole in your pocket. It is essential that you should assess the need for the loan.
Changing jobs to fund your lifestyle: Jobs should be changed for right reasons like giving a right push to your career. "Often people change jobs just for a higher income so as to accommodate their aspiring lifestyle. It seems like whatever you earn isn't enough. That prompts you to change jobs frequently," says Suresh Sadagopan, a certified financial planner and director Ladder 7 Financial Advisories.
    Even if your income increases, your expenses catch up very soon. Similarly if your income increases by 10% year-on-year and the expenses increase by 20%, then again the expenses will race ahead of income. "One may justify it as an aspiring lifestyle, but from a financial planner's perspective, it's welcoming unaffordable lifestyle," Mr Sadagopan adds. As experts say, it's always easy to step up the lifestyle but scaling it down takes a lot of thought and effort.
Action plan
If you are already on way to high debt situation, the logical solution is to scale down your expenses and start paying off the most expensive debt. On the other hand, you can just reconcile the loans at a cheaper rate for easier and effective debt management.
    Similarly, you can liquidate low-yielding investments to pay off expensive debt. Suppose you are running an expensive credit card loan at 50% per annum. There is no asset class which generates over 50% returns to stay invested. Hence it will be a good trade-off. Although this will erode your investment kitty, you can always compensate after repaying the expensive debt, says Swapnil Pawar, director Park Financial advisors.
    The solution to the problem varies from borrower to borrower. If self-designed strategies don't work, you can opt for professional help from financial advisors or debt counsellors.
    The debt counselling centres in India are manned by ex-bankers. "Hence we have the expertise and the knowledge to negotiate with the banks to lower the rates and charges on high debt loans," says VN Kulkarni, a counsellor at Abhay. "Even the banks would cooperate with us as it economises and fastens the loan recovery process for them," Mr Kulkarni adds.
    COUNTER CHECK

• Make a list of your loans and assess the costs attached to each of them

• Always repay your unsecured loans first, they are more expensive

• Liquidate your low yielding assets Reduce your consumption

• Take an insurance cover for emergencies

• Be careful and read the fine print before taking any loan vidyalaxmi.v@timesgroup.com