Deep in Consumer Debt? SMILE!
Efren Ll. Cruz, RFP®
(This article was featured in Business Mirror.)
Debt is death to those who abuse it. But what are you to do if you find yourself buried under a ton of consumer debt?
Well, the last thing that you should do is to frown to the point of making your eyebrows appear like they’re shaking hands. On the contrary, the first thing that you should do is SMILE!
I recommend smiling not so much to deny the existence of a consumer debt problem but more to conjure up the strength and resolve to attack a tough one. The act of smiling is nature’s pain killer and muscle relaxant. Smiling allows us to calm our emotions and think clearer. One tip though, we must smile honestly and profusely; in other words, we should smile with our whole being. Many times, this honest and profuse smile is manifested in smiling with our zygomatic major and orbicularis oculi muscles, which is smiling with our mouths and our eyes.
There is recent talk about DaVinci. Well, we all know that the world’s most famous smile is that of Mona Lisa, as painted by Leonardo DaVinci. However, if we look closely at Mona Lisa, she seems to display only a half smile. In fact, the University of Amsterdam ran an emotion recognizing software on Mona Lisa and found that she was only 83% happy while being 9% disgusted, 6% fearful and 2% angry. So sport a full and honest smile when you find yourself in deep consumer debt trouble.
Of course, smiling is just the beginning. Immediately after developing the proper disposition, we should begin to buckle down to solve our consumer debt problem.
The basic solution to solving debt problems is through restructuring to make debt repayment more manageable. The reason is that most debt problems occur because the debt that is over due needs to be paid within a very short period of time. Restructuring would allow you to repay your debt over a longer period of time and hopefully at a lower interest rate (and not just because of the absence of penalty charges). Please note, however, that while a lower interest rate may be charged, the total absolute amount of interest to be paid may be higher because of the length of the repayment period for the restructured debt. As a rule of thumb, therefore, you should restructure your debt over the shortest time and most affordable amortization level as possible.
The cheapest way to restructure is to borrow from relatives at concessional rates and then repay them over a number of years. You could raise an amount equal to your total outstanding debt and pay off all creditors, leaving behind just your relative to repay. The irony of it all, however, is that relatives tend to disappear during such times of need.
If relatives do become inaccessible, you could always negotiate restructuring with your creditors themselves. Creditors would rather get paid than have to run after your assets, especially if your assets are other than cash.
A better way of negotiating is to consolidate your debt with just one creditor instead of a couple. That way, you need to think of just one creditor, one amortization amount and one date on which to repay your debt. On the assumption that your credit standing is still good, consolidation can be facilitated by the balance transfer facilities of your credit cards, getting a home-equity loan or line or even borrowing against the cash value of your life insurance (assuming it is sufficient). In consolidating debt, just be aware that some creditors use “Add On Rate” or “AOR” in computing interest.
AOR computes your monthly interest expense based on the original loan amount, regardless of the amount of the loan that you have already paid up. The amount of monthly principal repayment, which is added to the monthly interest payments, is computed by simply dividing the original loan amount by the term of the loan. If you want to know the effective rate of an AOR offer, you may use the calculator that comes with my book, “Pwede Na! The Complete Pinoy Guide to Personal Finance.”
Sometimes, consolidating debt will not be enough. This is when you may want to sell some of the assets that you really don’t need like that 4th TV, your MP3 player, excess clothes and shoes etc. Do an “ukay, ukay” garage sale and you could realize a small fortune out of your excess assets.
You may also try to augment your income by performing a service. Don’t just go jumping into going into any business as that business may require a lot of money as well – something that you are currently short of. Rather, perform a service that you can do from home or do with little capital. Needless to say, the service must be moral.
Lastly, stay debt free. You’ve been through hell and back. Don’t fall into the same hole again.
Efren Ll. Cruz is a registered financial planner with the RFPI USA. He is author of the bestselling books, “Pwede Na! The Complete Pinoy Guide to Personal Finance” and “Pwede Na! The Complete Pinoy Guide to Retirement & Estate Planning.” He is Chairman and CEO of Personal Finance Advisers Philippines Corporation. This article does not constitute nor forms part of any offer or solicitation of an offer to buy or sell any securities. The opinion and views expressed herein are solely those of the author’s and do not necessarily reflect those of the Personal Finance Advisers Philippines Corporation.
Deep in Consumer Debt? SMILE!
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