These days’ loans have become an integral part of financing anything we wish to buy. Everything we aspire today, be it a smartphone, air conditioners, refrigerator, LED TVs, a super bike, a dream car, posh house; we fulfil through a loan.

Well, it is okay to take a loan as long you are prudently borrowing and are indulging within your means. But our experience shows that many a times, people overindulge without recognising the consequences. As a result they land up in a situation of debt-overhang. Their financial condition is like that of Greece – making merry but combating to repay.

Such was the condition of one of our client Mr Hemant (name changed to protect privacy) who took loans for everything he needed.
 

Here are his details and the loans he took:

Personal Details
Name	Hemant
Age	34 years
Marital Status	Married
Income	Rs 1,50,000 per month.
Expenses (other than EMIs)	Rs 55,000 per month.

So, as seen in the table above Mr Hemant was earning a healthy salary of Rs 1,50,000 per month. His expenses without considering the EMI on loans were Rs 55,000 per month. Also, following were the list of his Assets and Liabilities…
 

Assets			Liabilities
S.No.	Type of Assets	Amount (Rs)	Type of Loan	Outstanding Amount (Rs)	Interest Rate (%)	Pending EMIs (Months)	EMI (Rs)
1	Equity Mutual Funds	2,000,000	Home Loan	5,000,000	10.50%	210	52,114
2	EPF	200,000	Car Loan	800,000	11.50%	48	20,871
3	FD	500,000	Credit Card Loan	200,000	13.20%	36	6,758
4	Residential Flat	7,500,000	Personal Loan	1,500,000	15.00%	60	35,685
5	Cash in Bank	50,000
Total		10,250,000		7,500,000			115,428

Analysis and remarks...
So, as depicted by the table above Mr Hemant had assets totalling to Rs 1.025 crore, of which residential flat comprises 75% of the total assets. This flat was used as his primary home i.e. a flat in which he lived in along with his wife and thus could not be sold. He held Rs 25 lakh in mutual funds and fixed deposits, Rs 2 lakh in EPF (which could not be liquidated) and maintained some amount of cash in bank for contingency purpose.

But on the other side as far as liabilities are concerned, Mr Hemant had several of them, of which home loan comprised major chunk of his EMI outgo. A personal loan taken for his honeymoon was outstanding, carrying a very high rate of interest (@15.00%) resulting in second-highest high EMI outgo. He bought a luxurious car on loan for which he was paying interest at the rate of 11.50% p.a. His credit card loan bill for his marriage shopping was Rs 2 lakh carrying an interest rate of 13.20% p.a.

So, Mr Hemant was effectively in a situation of debt-overhang; because after deducting his expenses other than EMI on loans, he had a sum of Rs 95,000 every month while his total EMIs on loans amounted to Rs 1,15,428.

Hence at PersonalFN we recommended him to do the following:
 

• Advised him not to indulge in impulsive buying and being a spendthrift and use his credit card very thoughtfully. His credit card loan was still at a low interest rate; but in some cases interest on credit card can be more than 30% p.a.
   
• Avoid frivolous expenses such as on dinning out and movies, which can help him reduce his expenses
   
• Out of total equity mutual fund portfolio of Rs 20 lakh, Rs 12 lakh portfolio were asked to redeem, as some of them were not doing well and some were sectorial funds
   
• Rs 12 lakh out of redemption proceeds of equity mutual funds and Rs 3 lakh from premature withdrawal of fixed deposit were recommended to be utilized for paying off the personal Loan completely
   
• Rs 2 lakhs remaining was recommended to be utilized for contingency purpose
   
• Increase the credit card loan EMI from Rs 6,758 to Rs 12,308 to pay off this loan in next 18 months
   
• Suggested that his wife be an earning member, which can help the two of them achieve their financial goals in life with the benefit of dual income
   
• After all the above reshuffle, Mr Hemant was left with Rs 9,707 surplus which we advised him to invest prudently in different asset classes such as Equity, Debt and Gold, so that it can help him meet his long term financial goals
   

The above solution did help him to bring his finances back in order. If you are also facing such issues then you may have got an idea of how you can solve your problems. If you want to get your financial health in order or plan for your long term financial goals, do write to us at info@Personalfn.com and we will be happy to help you.

You can also access Personalfn Car Loan Calculator here.

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