Must Know: Negotiating with your Bank to Reduce Debt Burden

News of debt restructuring by banks for embattled large corporations in recent weeks has triggered a critical question in some quarters: Why not extend the same leeway to individual, small borrowers?

Now, while banks do not have formal mechanism in place to help retail borrowers, such borrowers can write to the banks to seek flexibility relief in terms and conditions of repayment. However, granting any such relief will be solely at the lender's discretion.

How do borrowers end up in a debt trap?

The reasons could be several. Unrestrained spending using credit cards is one of the chief reasons, as being unsecured form of credit, they charge interest as high as 49 per cent. Many credit card users make the mistake of going overboard with credit card spends simply because the funds are available, instead of spending within their means. The recklessness comes to haunt them at the end of the credit period, when they have to clear the bills. Some assume that paying the minimum amount due, which is a small amount, can keep them afloat. However, while you can avoid the defaulter tag by doing so, your interest payable will continue to soar, hurting your finances. Some end up maintaining more than one credit card merely to pay bills of another and get ensnared into a debt trap in the process. Leaving this apart, using personal loans also unsecured and high-cost debt to fund business needs or children’s education too could provide to be disastrous.

How can a borrower get the lender to rejig the repayment terms?

The onus is on you to convince the bank of your genuine intent to repay as well as current circumstances that are responsible for your plight. You can write a formal letter to your bank explaining your situation and seek their help. This could be in the form of easier EMI payment schedule and extension of repayment tenure, depending on your financial position, or even part-waiver of the accumulated interest amount. You could demonstrate your willingness to repay by mortgaging or liquidating your assets to make an upfront principal repayment. You could also make use of offers from credit card issuers that allow you to convert outstanding dues into EMIs for a fee, thus ensuring convenience in repayment.

How can borrowers survive the debt trap scare?

While you can make efforts to negotiate with your lenders for easier terms of repayment, it is still up to them to decide whether you qualify for some latitude. Therefore, if your debt portfolio is laden with several loans, a generous dose of self-help could be your best shot at avoiding a debt trap. Identify your investments and other assets that can be disposed off to bring down your loan burden. Make loan repayment your priority, instead of refusing to let go of your attachments, say gold jewellery or other possessions. The idea is to replace your high-cost, unsecured debt with loans backed by collateral which carry a lower interest rate, so as to give yourself some breathing space. Many borrowers are often unaware of old LIC insurance policies lying forgotten in their investment files. These can be put to good use as LIC offers a loan against its policies at a relatively lower interest rate of 9.5 per cent.

preeti.kulkarni@outlookindia.com