Are you in a debt trap? Here's help

Have you spent too much on your credit card to support your lavish lifestyle and are finding it difficult to repay the money now? Or have you run into a debt trap due to expensive borrowings that you made?

Is there a solution out of this debt trap? More importantly, how do you ensure that you do not repeat the same mistake again?

Part II: Want to know what's your credit rating?

Mam asked, Sir, I have run into credit card debt of up to Rs 42,000 in a year. I have been paying only the minimum amount due on my account. What should I do?

Harsh Roongta CEO apnaloan.com answers, The great thing is that you have not defaulted on the minimum amount due. You have two options: For temporary relief you can go in for another credit card and exercise the free or soft interest rate balance transfer facility. This facility is normally available only for a period of 3 months. So use this time to get your finance in order. Take care that you do not otherwise use the credit limit on the new card or use the freed up limit on the existing card.

For more permanent relief you should try and obtain a loan against some security (financial assets such as shares, mutual fund units, life insurance policies, NSCs, etc.) as they are cheaper and also available for a longer duration. If you do not have any security then you can also go in for a personal loan though that is a relatively more expensive proposition. But the biggest thing is to ensure that the problem does not become bigger during the time you are trying to solve it. So spend wisely from now on and do not use credit just because it is available easily. Remember there is a cost to pay for it.

AniruddhGupta asked, I have taken a personal loan of Rs 45,000 on phone on behalf of my Citibank credit card for 2 years. But now I want to close the loan by paying the entire amount due. The EMI is Rs 2,246 other than this I have been charged a two per cent processing fees also that is already paid by me. What will be the implications on the cost if I close the loan now? What do you suggest whether I should close the loan or continue with it? I have surplus funds. I have already paid four EMIs and the processing fees.

Harsh Roongta CEO apnaloan.com answers, If you can afford to prepay you should. Even taking into account the prepayment charges that you will need to pay the saving of interest will be higher than the return that you will earn by investing the money.

Just make sure that you have enough money kept aside for emergencies before making this pre-payment (as you may not want to be in a position to have to borrow again soon).

Shivaprabhu asked, Hello Sir, I have taken a personal loan for house construction purpose. How can I avail the tax benefit for the same?

Harsh Roongta CEO apnaloan.com answers, The name of the loan or the security for the loan is not important from the point of view of income tax. As long as you can prove that you used the personal loan for the purpose of construction of the house property you will be eligible for the tax benefits in relation to the repayments on such loans.

jeet asked, Hi Harsh. I have a housing loan of Rs 8.5 lakhs (floating 11.5 per cent interest rate) for the last 2 years and a personal loan of Rs 80,000. Do you think I should take a top up on my housing loan to clear the personal loan? Property is in Navi Mumbai and prices have almost doubled. Both loans are from ICICI. Will that make any difference? My take home is around Rs 33k per month.

Harsh Roongta CEO apnaloan.com answers, Of course the top up loan will be cheaper than the personal loan. Plus the tenure for the loan will also be longer. As a result of both the factors the overall EMI will be much smaller. This will be beneficial even after taking into account the pre-payment charge that you might have to pay for early payment of the personal loan.

Shez asked, Hi, which are the best credit cards which I can opt for?

Harsh Roongta CEO apnaloan.com answers, There is no such thing as the best credit card. If that was true then all other credit cards will need to close down. It all depends on your needs and the features that are important to you. Normally the features that are most important are the joining, annual and add on card fees, cash withdrawal fees, interest on cash withdrawal, rollover interest rate, maximum interest free credit period etc.

For a comparison of these features use the following link http://www.apnaloan.com/credit-card-india/comparators.html.

rajesh asked, Dear sir, I have been living an extravagant lifestyle for the last one year and I am Rs 7,80,000 in credit card debt. I have to make a monthly interest payment of about Rs 15 k per month. I am employed and have a salary of about Rs 40,000 all-inclusive.

Harsh Roongta CEO apnaloan.com answers, Firstly you should recognise the factors that led to this situation and ensure that this is not repeated in the future. No action that you take now will be effective if you continue making the same errors that led to the present situation.

Take professional help, if needed. If you have not defaulted on the minimum payment due on your credit card than you can try to take unsecured loans to pay off the credit card debt. A better option is to take inventory of all possible security that you can provide.

Trawl your drawers for the jewellery or any other financial security that you or your spouse or parents can provide. Taking a loan against that might be the best alternative you will have. They tend to be much cheaper and also repayment tenures can be large enough for you to pay off from your income.

The other alternative is friendly loans from your relatives or close associates. This also puts pressure on you to be more disciplined in the future as any conspicuous expenditure from you might not be acceptable to them after they have lent money to you. Use the money's raised to pay off your loan fully and obtain a no dues certificate in writing from the existing lenders. Do not hand over the money based on a promise of a no dues certificate that they will send a letter. Take it at the same time as you make the payment.

Rabu asked, How can I prove that the personal loan I have taken for the purpose of construction of the house property to avail tax benefits?

Harsh Roongta CEO apnaloan.com answers, The question of proof will arise only if your return is picked up for scrutiny. In which case you will need to provide the bank statements clearly showing the loan disbursements and the relative payments being made form there.

siddharth asked, What happens when one gets into a debt trap of the credit card company and the credit card company starts fleecing the customer by applying 'late payment fees', 'over limit fees' and over and above the so called interest charges as finance charges up to 40 per cent per annum! Also, the banks, instead of assisting the customer to tide over this debt trap in an honourable manner, resort to strong arm tactics and indecent methods? Is there no law in the country, that credit card companies cannot threaten, or extort such exorbitant interest rates and loot the customer in the name of various charges?

Harsh Roongta CEO apnaloan.com answers, There are two aspects to the issues that you have raised.

Firstly the bank has to follow the norms laid down by the RBI and the Indian Banks Association as far as the collection methodology is concerned. They are obviously not allowed to threaten and resort to strong-arm tactics etc. This is against the law and you can take the help of law in combating any such practices.

• Are you a victim of debt recovery agents? 

The second aspect relates to charges. Here, if the charges have been made known to the consumer at the time of issue of the card then it is very difficult for the consumer to turn around and argue that these are exorbitant after s/ he has actually spent the money.

The doctrine of consumer responsibility ensures that as long as the consumer was aware of the interest rates, fees and other charges then it would not be possible for him to dispute their reasonableness after he has used the credit.

Siddarth, my advice is do not take a confrontationist attitude on this issue. After all the banks have an obligation to their own depositors and shareholders also. Any default will be notched up in your records at the credit bureau and you will find it well nigh impossible to get another loan in the future. So try and work things out on the lines of what has been suggested in an earlier reply.

Part II: Want to know what's your credit rating?

Harsh Roongta is the CEO of apnaloan.com, an online guide for retail loan seekers. Apnaloan also enables loan consumers get best rates by making banks compete for their loan.