Past due too shall pass

Efren Ll. Cruz, RFP®

Question: I cannot anymore pay my debts. I had been borrowing from one lender just to pay off a loan from a previous lender. It is a never-ending cycle. Plus, I get stressful calls from collectors. Can you help?

Answer: Your being past due on your loan obligation does not make you trash. That is why your lenders do not have any moral or even legal right to treat you as such.

past due too shall pass — Photo by Alice Pasqual on Unsplash

In the first place, lenders know that if they make their loan offers seemingly too attractive like with ease of getting approved, they will inevitably invite people who, without much planning, borrow just to fix the shortfall in their cash flow. If a person does not have Php5,000 to pay today, there is a good chance he will not have that Php5,000 to pay 7 days later when the short-term personal loan he took out for that amount falls due.

But before I continue, please know that you entered into a contract to pay back a loan. And honor that contract, you must.

Admittedly, financial emergencies happen in life. But even in such situations, there needs to be some careful thought put into resorting to loans. And because there is a wide range of financial emergencies arising from simple wanton spending to medical concerns, I will reserve discussing the more serious ones for another time and just focus on those arising from financial mismanagement.

At the time of this writing, some credit cards had been offering low interest rates on their personal (cash advance) loans. From what used to be around the mid-twenties in terms of percentage interest rates on an effective per annum basis, offers had ranged from 8% to 10% p.a. On the other hand, some lenders tout ultra-low nominal (not effective) interest rates starting from zero percent.

Personal loans should not be the last resort in financial emergencies. When personal loans are the last resort, that can only mean that any loan (i.e. regardless of interest rate, repayment period, periodic amortization and amount actually released) will be contracted just to plug the financial gap. You can consider personal loans among the first options if and only if you put serious thought into the terms of the loans.

More importantly, borrowers should match the terms of personal loans with their purpose and ability to repay. Unfortunately, the seemingly attractive offers only lead borrowers to focus on the ease of loan application and release.

But what are you to do now that you have borrowed beyond your capacity to repay?

Live off a percentage of your income. Do not try finding additional income first. Just compute how much money you can save if you had no debts to pay. If you find the savings too low or non-existent, break up your expenses into “must spend” and “may spend.” Must spend expenses are those for which you need to shell out money even if you were not earning. May spend expenses are the discretionary or optional cash outflows.

Reduce may spend expenses and check if there will be savings. Try to come up with a maximum savings amount that you can use to service your debts while allowing you to still live a decent life. If you feel more savings can be had, re-examine what you classified as must spend. For example, you may have classified your subscription to a video streaming service or your weekly food trips to the mall for family bonding as must spends. Perhaps there is wiggle room there for a lower budget.

If after reducing your expenses your savings still fall short of servicing your debts on time, it is time to negotiate with your creditors to ask for more lenient terms like a longer repayment period, a lower interest rate and even a discount on the outstanding principal. Ideally, you should limit this negotiation to those with whom you are past due. But negotiations should not stop there if you find that you will need to also talk to creditors with whom you are current.

When you negotiate, already expect that you will initially be greeted with a rejection. Just keep trying with sincere justifications on why your creditors need to accede to your request. Always send letters via courier to document your communications so that there is a third party who can keep record of their receipt. This documentation will be part and parcel of your proof that you are bent on settling your loan obligations and not running away from them.

past debt too shall pass — Photo by Adem AY on Unsplash

Debt collectors are people too who will react positively if you treat them with respect. Expect repeated communications from them within each day. Just craft a standard reply that you are already working on a solution to pay them and that they should refer to the letter you sent. If they follow up by SMS or email, send that standard reply also by SMS or email. Avoid voice communication as much as possible as this is many times difficult to document. If you cannot, just read them your standard reply, wish them a good day, and hang up. But always remember to send your letter requests as soon as possible.

Also, turn the tables on debt collectors. If after one week, they have not replied to your letter, follow up with them. This time around, you will be on the offense.

And should debt collectors become abusive, you can always report them to their respective regulatory agencies (e.g. SEC, BSP) and to the National Privacy Commission as well as to the NBI and PNP.

If you stick to the foregoing strategy, your past due too shall pass.

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Efren Ll. Cruz is a Registered Financial Planner and Director of RFP® Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines and a YAMAN Coach™. He also writes for the Philippine Daily Inquirer’s Money Matters column HERE.

For more financial management advice for entrepreneurs, you can check out the column The Business of I Do on Inspirations.ph every Monday (publication date may change without prior notice) or send questions directly to yaman@personalfinance.ph.