Loans and credit facilities are two popular banking products to borrow money. When you apply for them, you’re taking on a future obligation. However, unforeseen events can deal a blow to your finances and ability to pay off debt. Here's how to spot red flags early and what to do if you can't repay a loan.
Most peoples' income is the salary they earn. If you need more money, you may make a financial decision like applying for a loan or a mortgage. But sometimes personal setbacks, like unemployment, illness or low disposable income hurt your finances and ability to pay down debt.
Changes in inflation, currency devaluation and recession can also reduce liquidity and ability to pay for both households and companies, big and small.
Signs to take action
Though it might be difficult to spot problems, your financial health will tell you when something isn’t right. Signs that you should put your finances under a microscope include a large slice of your income to repay debt, fewer monthly savings or paying for groceries, public services and other essentials with a credit card or a personal loan.
If whatever income you allocate to repaying debt keeps you from being in good financial health, you need to reduce what you owe straight away. Don’t forget the 50-30-20 rule: 50% of your income allocated to everyday needs (housing, food, transport, etc.); 30% to non-essential expenses (leisure, travelling, eating out, entertainment, etc.); and 20% to savings.
You can avoid default, overindebtedness and financial (and mental) stress. But if you still find yourself struggling to repay a loan, it’s time to take action and sit down with your lender to adapt the terms and conditions.
What to do if you can’t pay your debts
First, go to your lender and tell them what's up. It's in yours and the bank’s interest to find a win-win solution based on the type of debt, laws of your country and other things. Your bank may provide many options to restructure your debt. The most common are:
You can lump all or most of your debts into one to pay a single instalment, which is usually a lower amount than each instalment paid separately. This usually extends the repayment term. You should check for new interest rates and servicing fees.
A grace period is extra time to pay less or suspend repayments so you can organize your finances and return to your previous payment schedule. You must pay attention to changing terms and conditions, like a new maturity date or interest rate.
A common way to lower repayments is extending the term of a loan. That way, you can spread the amount you owe over a longer period and reduce monthly instalments. If you see no end to your financial struggles or won’t be able to get on the straight and narrow in the midterm, extending the loan term could make things a little easier, even if you have to pay interest early on.
You should be honest with yourself and with your lender about your options and the decision you make. Otherwise, you might be biting off more than you can chew and end up in an even trickier situation. Check out this article on calculating how much you’re able to borrow (in Spanish) on Santander Consumer España’s blog, Tu Futuro Próximo (“Your near future”).
It’s worth thinking about how you manage your finances to understand why you've fallen on hard times. Cutting expenses, finding new sources of income, drawing up a budget and changing your consumption habits are some ways to boost your finances.
In each country, there can be different ways to restructure debt; but overindebtedness and default hurts you the same, no matter where you are. Spotting the signs and letting your bank know quickly are crucial to finding the best solution fast.