With home loan interest rates falling, Ashok Kumar (name changed), 37, is excited to zero in on his dream home. He had accumulated sufficient savings to make the down payment; he decided to fulfil the balance via a home loan.

It's been a week since Ashok, who works at a leading software consultancy company, submitted his home loan application. Getting jittery on not receiving any updates, he decided to pay his bank a visit. Overcome with nervousness, he timidly asked the bank officer the status of his loan. He wasn’t prepared for what he was about to hear next.

“Your application is rejected,” the public sector bank employee responded crudely, as if Ashok had committed a crime.

These words shook Ashok and his dreams came crashing down. How would he face his wife and five-year old daughter, he thought to himself.

On enquiring further, he was told that his loan application was rejected because his credit report showed an EMI default on a personal loan and his CIBIL credit score was below average at 622.

Little did he know his past would come back to haunt him.

He remembered taking that loan very clearly. It was little over five years ago, when he had to fund his wife's medical expenses. She was going through a tough pregnancy, and the medical costs soared through the roof. Rather than borrowing money from his relatives, he took a loan of Rs 1.5 lakh on his credit card to fund the expenses.

Ashok had a decent job and expected to pay off the 24-month loan within a year. He believed he had it well planned; however, things worked out differently.

A spendthrift by nature, the young software developer wanted to give his wife and new-born daughter the best of everything. Unfortunately, this attitude cost him dearly.

Being the sole earner, Ashok spent more on his credit card than he earned. Little did he realise that he had fallen into a debt trap. His minimum monthly payments and loan EMI soon became a burden. He started losing sleep over his financial crisis. Less than a year after availing the loan, he defaulted on his EMI payments.

Ashok decided to take back control of his finances. He approached a credit-counselling centre and took the necessary steps of budgeting, repayment etc., to bring his finances back on track.

He cleared the loan and credit card outstanding over the next 18 months. Sadly, the default in payments left an indelible mark on his CIBIL credit report. Something, he didn't know existed until today.

Seated in the reception lounge of the bank, a despondent Ashok stared into nothingness, as his dream home continued to remain a dream.

While we can empathise with Ashok, this is a situation that none of us would like to be in. His mistake of falling in to a debt trap is precluding his dream turning into reality.

You can avoid such a situation by taking timely action to fix your personal finances before it is too late. PersonalFN has outlined a few steps below that you need to take when you find it difficult to pay your EMI's.

Step 1: Don't Panic

It may be an uneasy situation for you, but banks often deal with customers who default on payments. There is no need to feel as if you have a great weight on your shoulders and you have to bear it yourself. In fact, your bank will be the first entity willing to help you. Difficulty in paying an EMI, even if it is a home loan, is not the end of the road.

Step 2: Get Your Papers in Order and Call Your Lender

Create a file containing all your past EMI payment details, date of taking the loan, tenure, interest rate, EMI amount, and so forth. Have this handy when you talk to your lender. Tell your lender the genuine reason(s) that have rendered you unable to pay the EMIs, affirm your intention to repay the loan as soon as you can, and enquire what options they can offer you.

Step 3: Consider Your Options, in Dialogue with Your Lender

If you have paid your EMIs on time, so far, the bank knows you're a genuine borrower. They will consider this aspect and work together with you to find a mutually feasible solution. 'Genuine intent' to repay is the single largest thing that will work in your favour. Be sure to make it very clear to your bank that you do intend to repay and would like to work together to find a solution.

Loss of a job, illness, or an accident that may render you unable to work are some of the genuine reasons that banks understand.

Here are your options the bank may offer you when paying EMIs get tough...
 

• Refinancing your loan: If the problem is one where the EMI is too high, the bank will restructure your loan. It will reduce your EMI amount and increase the tenure. This way, you can pay the EMI comfortably, and the bank too does not lose out, as it recovers the interest over the longer tenure. But keep in mind that the payments you now make will eventually cost you more, in terms of total money repaid; but if breathing room is what you need, this will provide it.
   
• Deferring Your Payments: Maybe the problem is not that you can't pay enough; it is that you can't pay at all. You can approach the bank for deferral of your payments, if you are in a position where you feel that within a few months your financial situation will change. Maybe you will get a new job and be able to start repaying your loan a little bit at a time, perhaps at a lower EMI. The bank will grant relief, giving you a window of opportunity to calmly seek ways to increase your cash flows.
   
• Lump Sum Settlements:This, for obvious reasons might not be feasible for a home loan, but it can work for a personal loan, credit card debt, or a car loan. On a case to case basis, banks sometimes facilitate you to make a lump sum settlement of outstanding dues. They may waive some of the charges or some of the amount and charges, and you can pay the rest as a loan settlement. However, this may muddle your credit score. Getting a loan in the future, if you want one, may become either very difficult or very expensive, or both.

Here are additional steps you can take to manage your finances during a crisis, apart from negotiating with the creditors...

- Reduce your expenses
- Find additional sources of income
- Make a list of your assets
- Sell unwanted items
- Consult an expert
 

To live a healthy financial life, make sure you:

-Maintain sufficient contingency reserves
-Don't fall into a debt trap
-Have adequate life and health insurance
-Undertake financial planning

To conclude..

Naturally, the best solution is not to get into messy financial situations in the first place. One of the main tenets of financial planning is 'safety'. Our life is filled with uncertainties. Although you can't do much to avoid what's meant to be, it is wise to at least be prepared for unforeseen situation.

PersonalFN is of the view that if you are disciplined in your approach towards financial planning, then it will be easier to keep your financial health in the pink.

You, too, can become your own financial planner by signing up for PersonalFN's comprehensive A to Z e-course. This video e-Course will be your guide to the most serious decisions regarding personal finance matters.

Out of the 8 modules in the e-course, Module #1 will focus on making a budget and managing your cash flows. After this module, you will be able to design a budget and optimise your cash flows in a prudent, stable manner.

Module # 7 focuses on managing debt. Ensure the loans you take serve their true purpose and don't become a financial burden. This module will aid you in avoiding the deathly traps of debt, and take proper advantage of debt.

Apart from the video tutorials, you will get access to a host of downloadable calculators, such as a Cash Flow Calculator, Retirement Calculator, etc, Absolutely Free! Don't miss this opportunity. Subscribe to the e-course now!

You can also access Personalfn Car Loan Calculator here.

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