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Gnawing away at mounting debt

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Customers wait to be served at a branch of Siam Commercial Bank in Bangkok.
Customers wait to be served at a branch of Siam Commercial Bank in Bangkok.

Many borrowers are still faced with heavy debt burdens amid the coronavirus outbreak, with most having been pressured by diminishing income and lower debt-servicing ability.

In the wake of worsening economic conditions aggravated by the virus crisis, both regulatory bodies and financial institutions have implemented several debt relief measures to help borrowers overcome difficulty.

Borrowers who want to ease financial burdens can go to lenders asking for debt relief measures. If you cannot pay back loans under the existing conditions, you should visit the bank immediately before your unpaid loan is classified as a bad debt and subsequently branded with a bad credit score.

If your loan is classified in the non-performing loan (NPL) segment, you can ask the creditor for easing debt conditions as well.

Before going to the bank, you should have some idea about monthly instalments in line with your existing income and capability for debt repayment. These are the Bank of Thailand’s tips to ease excruciating financial burdens amid the difficult situation.

DEBT RELIEF SUGGESTIONS

There are eight methods for debt relief recommended by the Bank of Thailand, all of which are under the central bank’s policy to ease consumer debt burdens while the crisis persists, with financial institutions complying with the guidance.

An extension for debt instalment periods is the first recommendation. This is a popular instrument to ease monthly debt payment in accordance with lower income.

For instance, when a borrower has a loan contract with a bank for 10 years and the borrower has paid the loan for six years, but the virus outbreak lowers his/her ability to make existing monthly instalments for the remainder of the four years. In this case, the borrower can request prolonging the remaining loan repayment period by 1-5 years in order to reduce monthly debt service.

The creditor will also consider the borrower’s age in accordance with the remaining debt-servicing period. The remaining years of debt restructuring should not be more than eight years.

Second, a suspension of principal or “debt holiday” to stop loan repayment temporarily comes to mind when borrowers are facing difficulty repaying their debts.

Normally, an instalment loan is divided into two parts, principal and interest. For example, a bank sets an instalment of 20,000 baht per month, of which 8,000 baht is the principal and the remainder is interest.

Under a grace period for principal, a borrower is allowed to pay only interest at 12,000 baht a month, a move to ease the borrower’s financial burden.

This instrument, however, will not reduce the principal repayment during the debt suspension period. While debtors are relieved of financial burden at present, borrowers will be faced with a higher amount of monthly instalments later down the contract period, also known as “ballooning”.

Banks will provide borrowers with a grace period for principal loans for 3-6 months, per the central bank’s debt relief measures.

In the event of improved financial conditions, you can repay your debt in a bigger amount than the monthly repayment in order to reduce the principal. This method will also help you to pay off that nasty debt faster.

Interest rate cuts are the third option. Lower lending rates help lower financial burdens for borrowers.

For instance, when a borrower is charged the minimum retail rate (MRR) of 2%, but he/she cannot pay the rate as income is shaved by the crisis, the borrower can ask the lender for an interest rate cut.

Basically, banks will take into account several factors for cutting the loan rate for a customer. These include a borrower’s debt repayment record, type of loan, loan collateral and the bank’s financial cost.

As the rate-setting Monetary Policy Committee has reduced the benchmark interest rate gradually to sustain economic conditions battered by the pandemic crisis, this also helps lower loan rates of prime interest rates, such as the MRR, minimum lending rate (MLR) and minimum overdraft rate (MOR). On average, the prime loan rate has declined by about 2 percentage points from the end of last year until now.

In addition, the regulator requires financial institutions to cut ceiling rates for credit cards, personal loans and car title loans by 2-3 percentage points under the central bank’s debt relief measures.

Banks will take into account several factors when cutting the loan rate for a customer. Varuth Hirunyatheb

INTEREST CONVERSION

The fourth option is the cancellation or relaxation of penalty interest rates. The central bank has required financial institutions to charge the penalty rate based only monthly debt default to ensure fairness to borrowers. With this regulation in place, the interest rate charge should be reasonable for borrowers to service their debt, which will in turn possibly prevent NPLs from rising significantly.

Fifth is additional credit line offerings. Amid the economic downturn and geopolitical uncertainties, working capital given to small-business operators is an instrument helping them overcome the crisis. Customers who want additional credit lines to support business liquidity should prepare for business feasibility plans spanning the next 6-12 months for lenders’ assessment.

For instance, business operators should estimate their fixed costs, including wages, raw material expenses and utility fees.

Basically, banks will approve additional loans for customers who have a good history of debt repayment for both the principal amount and interest. Banks will also evaluate how a credit line on additional working capital will account for total liabilities for a business operator.

The sixth tactic is converting short-term loans to long-term loans or from revolving loans to term loans.

Normally, revolving loans are charged at higher rates than term loans, so borrowers can reduce their interest burden when converting from revolving loans to term loans.

For example, the ceiling interest rates of 28% and 18% are applied to a small-business operator that uses a cash card or credit card loan. But when converting to term loans, the charged rates would be prime lending rates in the range of 5.25-6.05%.

Debt refinancing is the seventh option. Borrowers using this method would get better loan conditions such as lower interest rates, but they have to pay for loan management fees. Basically, borrowers can refinance from an existing bank to a new bank after completing an instalment for the first three years and having a good repayment record.

Lastly, you can close a loan account by paying off the existing debt. You can escape your debt burden with this method if you manage to raise money by asset sales, borrowing from relatives or using your savings. Negotiating with your creditor for a certain discount to pay off the debt can be done, but it is difficult if the collateral value is higher than the debt amount.

In the latest move to assist debtors, the central bank has announced a debt consolidation measure for retail debtors by allowing debtors to undergo debt restructuring by consolidating unsecured loans, such as credit cards and cash cards, with mortgage loans.

Debtors’ houses would be used as collateral for this debt restructuring process. The measure applies only to those who borrowed from the same lender.

Mortgage loans must not be classified as NPLs, while unsecured loans can be classified as either NPLs or performing loans.

Interest for mortgage loans will remain unchanged, while interest for debt restructuring by using debtors’ houses as collateral will be based on the MRR.

The period of extended debt repayment will have to be negotiated by the borrower and lender. The measure will run from Sept 1, 2020 to Dec 31, 2021.

DEBTOR’S PLEA

Nathawan Chimthaworn, 34, an employee of a private company, said she asked for an interest rate cut for her mortgage from Siam Commercial Bank (SCB) after being affected by the government’s lockdown policy. With strict lockdown measures imposed to contain the coronavirus on home soil, the company, which organises events, was at a standstill.

Despite getting her normal monthly salary, the lockdown policy had affected her overtime income. As a result, the amount of monthly income she usually earns diminished considerably.

Although SCB offers several debt relief measures such as debt holiday and extended loan repayment, such instruments were insufficient for Ms Nathawan’s actual needs. The interest rate cut would help her ease compounding financial burdens and ensure that she repays the debt normally.

She presented evidence to the lender about her lower monthly income, which weakens her debt-servicing ability under the existing conditions. At the same time, she also showed a good payment record during the past four years of instalments.

“With a lower interest rate charged, I can service the debt normally and still be classified as a good customer,” she said. “If the situation returns to normal and I can earn a higher income, I plan to reduce the principal to shorten the instalment period from the existing 20 years to lower repayment risk amid economic uncertainties.”

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Bad Credit

Martin Lewis issues guidance on using credit cards to build ratings – best deals | Personal Finance | Finance

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Martin Lewis regularly urges savers to use caution when utilising debt themed products but at the same time, he acknowledges the need for a decent credit rating to get by financially. Today, the Money Saving Expert was questioned by viewer Miranda on how one can build their credit rating in difficult circumstances.

“What I’d then like you to do is go and do £50 a month of normal spending on it, things you’d buy anyway.

“[Then] Make sure you pay the card off in full every month, preferably by direct debit so you’re never missing it because the interest rate is hideous.

“That way you won’t pay any interest.

“You do that for a year, you’ll start to build that credit history, showing them you’re a good credit citizen.

“Then you’ll be able to move into the sort of more normal credit card range.

“So, bizarrely, to get credit you need credit. What credit will you get? Bad credit, go get the bad credit just make sure it doesn’t cost you.”

Consumers of all kinds may not have the best options at the moment as recent analysis from moneyfacts.co.uk revealed.

In mid-November, they detailed that a number of high street banks have cut the perks and interest on a number of their current account deals.

On top of this, the Bank of Scotland and Lloyds Bank made credit interest cuts of up to 0.5 percent.

Rachel Springall, a Finance Expert at moneyfacts.co.uk commented on the few options consumers and savers currently have available: “Clearly, it is vital consumers decide carefully if now is the time to switch, but if they wait too long, they may well miss out on a free cash switching perk.

“At present, providers will be assessing how they can sustain any lucrative offers in light of the pandemic.

“With this in mind, we could well see more changes in the months to come and if this does indeed occur, consumers would be wise to review whether their account is still worth keeping.”



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Should you use a balance transfer to pay off debt?

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Should you use a balance transfer to pay off debt?
Image source: Getty Images.


A balance transfer might be the solution if you have debts and want to gain control over your finances. But whether a balance transfer is right for you will depend on a number of factors.

Things to consider before using a balance transfer

The size of your debt

If you want to apply for a balance transfer credit card, be aware that most providers will allow you to transfer up to 90% of your credit limit.

Your credit limit will be dependent on your own personal circumstances, including your salary, your credit history and your residential status (homeowner or renter).

Be realistic about your debt. For example, if you earn £25,000 per year and you have a debt of more than £15,000, a balance transfer might not be cheapest way to pay the debt.

The time taken to pay the debt

The main advantage of a balance transfer credit card is that many offer an interest-free period on the balance. So, if you can pay off your balance in that period, you won’t accrue any further interest charges.

However, these periods typically range from 18 to 24 months, so if you think you will need more time to pay the debt, you may need to factor in additional interest charges when the interest-free period ends.

Whether or not a balance transfer is the right debt payment solution will depend on your personal circumstances. Check our balance transfer calculator if you want to work out how much a balance transfer could save you in interest payments.

Your credit score

The advantage of a good credit score cannot be underestimated in this situation.

When applying for a balance transfer credit card, the company will check your credit score. Based on this score, they could refuse your application.

Even if you are accepted, if you have a bad credit score they could reduce your credit limit. Ultimately, this will determine the benefit of a balance transfer as a suitable debt payment solution.

If you think your credit score might be a problem, it’s worth checking with the credit reference agencies before applying. That way you can avoid any nasty surprises.

There are three main consumer credit reference agencies in the UK. They are Equifax, Experian and TransUnion (Noodle).

Alternative solutions to balance transfers

You could still use a balance transfer even if the size of your debt is bigger than the credit limit.

Transferring part of the debt would enable you to benefit from any interest-free period, where applicable.

Alternatively, if you have multiple debts, you could consolidate all of your debts so that you can make a single regular payment. If necessary, you could do this using an unsecured personal loan over a period longer than 24 months.

Take home

Look at your own personal circumstances with a critical eye. Remember that you need to factor in living expenses when thinking about how long it will take you to pay off your debt.

Balance transfers are a useful method for debt repayment, but be aware that credit cards are an expensive way to borrow money. Take full advantage of any 0% deals wherever possible. Check out our list of the best 0% credit cards.


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Turn credit declines into a win-win | 2020-11-20

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The pandemic has left millions of people needing credit at a time when lending standards are tightening. The result is a lose-lose situation—the consumer gets a bad credit decline experience and the credit union misses out on a lending opportunity. How can this be turned into a win-win?

The case for coaching

Let’s start by deconstructing the credit decline process: The consumer is first encouraged to apply. The application process can be invasive, requiring significant time commitment and thoughtful inputs from the applicant.

After all that, many consumers are declined with a form letter with little to no advice on actions the applicant can take to improve their credit strength. It is no wonder that credit declines receive a poor Net Promoter Score (NPS) of 50 or often much worse.

On the flip side, forward-looking credit unions provide post-decline credit advice. This is a compelling opportunity for several reasons:

  • Improved customer satisfaction. One financial institution learned that simply offering personalized coaching, regardless of whether or not consumers used it, increased their customer satisfaction by double digits.
  • Future lending opportunities. Post-decline financial coaching can position members for borrowing needs even beyond the product for which they were initially declined.
  • Increased trust. Quality financial advice helps build trust. A J.D. Power study noted that, of the 58% of customers who desire advice from financial institutions, only 12% receive it. When consumers do receive helpful advice, more than 90% report a high level of trust in their financial institution.

Provide cost-effective, high-quality advice

AI-powered virtual coaching tools can help credit unions turn declines into opportunities. Such coaches can deliver step-by-step guidance and personalized advice experiences. The added benefit is easy and consistent compliance, enabled by automation.

AI-based solutions are even more powerful when they follow coaching best practices:

  • Bite-sized simplicity. Advice is most effective when it is reinforced with small action steps to gradually nurture members without overwhelming them. This approach helps the member build momentum and confidence.
  • Plain language. Deliver advice in friendly, jargon-free language.
  • Behavioral nudges. Best-practice nudges help customers make progress on their action plan. These nudges emulate a human coach, providing motivational reminders and celebrating progress.
  • Gamification. A digital coach can infuse fun into the financial wellness journey with challenges and rewards like contests, badges, and gifts.

Virtual financial coaching, starting with reversing credit declines, represents a huge market opportunity for credit unions. To help credit unions tap into that opportunity, eGain, an award-winning AI and digital engagement pioneer, and GreenPath, a leading financial wellness nonprofit, have partnered to create the industry’s first virtual financial coach. To learn more, visit egain.com.

EVAN SIEGEL is vice president of financial services AI at eGain.

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