Presentations text content in Debt and Debt Management
Slide1
Debt and Debt Management
By Hema Moryani
Slide2Basics of Debt
They are contracts in which one party lends money to another at certain pre determined terms
Rate of Interest
Tenure
Interest payment Schedule
They may be referred to as gilts, bonds, debentures
Slide3Basics
In times of economic boom
Salaries rise
Spending rises
Lifestyle changes
This gives rise to personal borrowings
Loan by individual – housing loan, personal loan, education loan, credit card
Slide4Type of borrowing
Good Borrowing
The generate an asset
Leads to income
Bad Borrowing
Splurge on luxury that cannot be afforded
Depreciating assets
Higher interest rates
Slide5Types of loan
Secured loans
Mortgages
Any other asset, gold, securities
Unsecured loans
Personal borrowing
Credit cards
Slide6What leads towards a debt trap
Excessive borrowings
High interest rate borrowings
Borrowing of money at higher rate to pay off a low rate loan
To improve liquidity
Slide7Debt consolidation
Borrow at a cheaper rate to pay of higher interest bearing loan
Consolidate all unsecured loan against a secured loan
Slide8Debt Consolidation
To give up several loans and take one loan
Ascertain the period you would like to repay the loan
Rate of interest
Amount to be repaid according to the available liquidity to avoid defaults.
Slide9Debt Settlement or Debt Relief
Debt settlement or Debt relief or bankruptcy
Helps in reduction in the interest rates or
Settlement worked up to payoff a large lump sum
Slide10Debt forbearance
Where the lender gives up the interest portion but the principal repayment is maintained
Slide11Debt Restructuring
Refers to the reallocation of resources or changes in the terms of the contract
General Restructuring
Works to the benefit of both the debtor and the creditor
Would normally refer to the extension of the repayment or lowering of interest rate
Slide12Debt Structuring
General Restructuring
Existing debt is replaced by a new debt
Where the interest rates may be altered
The tenure may be postponed
Slide13Debt Restructuring
Troubled Restructuring
The creditor(lender) incurs some loss
He may have to give the accumulated interest amount
Dip in the collateral security
Conversion of loan to equity
Slide14Debt To Income Ratio (DIR)
Monthly Income Rs.100000
Type of loan
EMI
Percentage
Ideal limits
Personal loan
5000
5%
Vehicle loan
15000
15%
Credit card
20000
20%
Total
40000
Percentage(Excluding Mortgage)
40%
40%
30-35%
Mortgage EMI
25000
25.5%
20-25%
Total Percentage
65%
65%
50-60 %
Slide15Debt To Expense Ratio
Income Rs.1,00,000
Household Expense
25000
Education Expenses
7500
Personal expense
5000
Other expense (petrol etc)
5000
Total expenses
42500
Percentage to income
42.5%
Slide16Using the DIR Method
Target those debts for faster pay offs that have a biggest impact on the income ratios
Take the mortgage loan and try to re- structure the loan
Review the budget in the areas to reduce spending and to create savings
Slide17Dealing with credit cards
Debt Snowball Method
List all the credit cards
CARD 1
CARD 2
CARD 3
TOTAL
AMOUNT
5000
7000
13000
20000
MINIMUM PAYMENT
560
370
700
1630
Other payments
10870
Slide18Remember !!
Borrowing cost money
Never borrow what you cannot repay
Never borrow for luxuries when you cannot afford necessities
Prioritize your borrowing
Reserve some borrowing capacity for emergencies
Debt and Debt Management
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