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Debt and Debt Management

Debt and Debt Management. By Hema Moryani. Basics 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

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Debt and Debt Management

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  1. Debt and Debt Management By Hema Moryani

  2. Basics 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

  3. Basics • 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

  4. Type 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

  5. Types of loan • Secured loans • Mortgages • Any other asset, gold, securities • Unsecured loans • Personal borrowing • Credit cards

  6. What 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

  7. Debt consolidation • Borrow at a cheaper rate to pay of higher interest bearing loan • Consolidate all unsecured loan against a secured loan

  8. Debt 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.

  9. Debt 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

  10. Debt forbearance • Where the lender gives up the interest portion but the principal repayment is maintained

  11. Debt 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

  12. Debt Structuring • General Restructuring • Existing debt is replaced by a new debt • Where the interest rates may be altered • The tenure may be postponed

  13. Debt 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

  14. Debt To Income Ratio (DIR) • Monthly Income Rs.100000

  15. Debt To Expense Ratio • Income Rs.1,00,000

  16. Using 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

  17. Dealing with credit cards • Debt Snowball Method • List all the credit cards

  18. Remember !! • 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

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