More often many of us consider a personal loan as the best option to meet contingencies. Opting for a personal loan without studying its terms and conditions and services could cost you more than what you intended. If you are stuck in a personal loan debt, here are some ways to free yourself:
Asset monetisation
If you have one or more of these assets such as car, home, life insurance policies, tax saving certificates, shares, bonds and debentures, or gold jewellery, bank fixed deposits, or mutual funds, you could monetise them to pay off your debt. In fact, some banks offer loans against assets that carry a lower rate of interest which could be used to settle your personal loan.
Consider debt consolidation
Another effective way of dealing with your debts is through what is called debt consolidation. In this method, you could pay a relatively lower installment every month over a longer tenure to the lender who will combine all the components of your debt portfolio into one. Debt consolidation is an effective option, if you have too many loans to take care of and not enough monetary capacity for astute financing as this method will give you a built-in view of your credit worthiness. Though beware that when you calculate the total loan cost in the long run, it might become expensive.
However, the idea is to obtain a short term relief under the current circumstances. Once your finances improve aim to close the loan earlier than planned.
Top up or convert to a secured loan
If you had taken a home loan, you can move to a lower cost credit by going for a top up on your current loan. Another viable option would be to talk to your bank and if they agree convert the current loan into a secured loan against your vehicles, house, but only if the property is free from debts, liens or mortgages.
This way you can restructure the loan for a lower monthly payment after taking into consideration the loan tenure and the interest rate. Perhaps, the only drawback in converting a personal loan into other loans having collateral is that you stand to lose the collateral at risk in case of default on your loan amount, which could mean a lot when there is a contingency in the future. Hence, it is advisable to convert your current debt into a secured loan only after analysing your capacity to repay the secured loan so that you don’t stand to lose the collateral at risk.
Remember that even a single default on your personal loan could trigger unexpected after effects in the repayment of your current loan and getting a future loan. In cases of the first default, it is ideal for you to talk to your lender and find a way out. Under normal circumstances the lender could impose a penalty of roughly around two per cent on the default amount, which will only add to your current burden. So if you have any problems try to discuss them with the lender to seek advice on possible solutions.
Remember, a personal loan is always a risky alternative finance with a higher rate of interest and it is better to close the loan as early as possible.
(The writer is the CEO of bankbazaar.com)