I am a management trainee, earning a monthly stipend of Rs 25,000. While I was studying, a bank gave me a credit card with a limit of Rs 1 lakh. I used up the entire amount, and I now want to repay as soon as possible. But because of my monthly expenses amounting to almost Rs 18,000, I have not been able to pay more than the minimum amount. I fear I am getting into a debt trap.
A situation where you pay only a minimum five per cent of the amount due on the credit card for an extended period implies you are not headed towards a debt trap, but are already into one. Credit card is the most expensive debt available, with interest payable above 39 per cent annually. Besides, all fresh expenses also attract this high interest from the date of purchase, which otherwise would be interest-free if you settled all your bills completely every month. I would suggest that you ask your bank to convert your entire credit card dues into equated monthly instalments (EMIs) and pay the same regularly to clear your dues. Post this, settle all monthly dues on the card regularly. It is advisable that you control your discretionary expenses to create a contingency fund. Please remember that credit cards should be used more as a convenience tool to make payments and not as a means to avail credit.
I took an education loan of Rs 1.8 lakh in June 2006. My course ended in May 2010. I did not pay an interest on the loan during the course. My EMIs will begin next month (Rs 14,000). My father has an ongoing car loan (Rs 4 lakh) and personal loans (Rs 3 lakh) taken for my sister’s wedding (EMI = Rs 30,000). My parents are also servicing a joint home loan, of which around seven-eight instalments are remaining (EMI = Rs 20,000). Unfortunately, my father lost his job six months before and our current collective income (my mother’s and mine) is only Rs 50,000. Our monthly expenses, after severe cutbacks, are Rs 18,000. Our repayments are erratic, as each month we miss some EMI. How do we streamline our loan repayments?
According to the information given, total monthly instalments work out to Rs 64,000, whereas your combined disposable income to pay EMIs is Rs 32,000, leaving a gap of Rs 32,000. Since your home loan is almost getting over, I would suggest that you take another mortgage loan against the house and settle all other loans in one go. In the absence of exact information about outstanding loans, I expect these to be in the range of Rs 8-10 lakh. I feel your house should have a value higher than this. Take a loan in the name of your parents with you as a guarantor/co-borrower. You can easily work out a repayment period of about five years, where EMI shall be less than Rs 25,000 per month, well within your income. Alternatively, since the education loan was taken for your education, you may continue to service this from your income (which will entitle you to claim income tax benefits for the interest paid). And, take a smaller loan against the house or even a personal loan of Rs 5-6 lakh, with a five-year repayment period, to settle all other loans. This will also keep the combined EMIs well within your income limits.
The writer is senior vice-president and group head, retail strategy and branding, Arcil.
The views expressed here are his own.
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