Eat the growing debt

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

Many borrowers still face a heavy debt burden amid the coronavirus outbreak, with most under pressure from declining income and declining debt service capacity.

In the wake of worsening economic conditions made worse by the virus crisis, regulators and financial institutions have implemented several debt relief measures to help borrowers overcome difficulties.

Borrowers who wish to ease their financial burdens can turn to lenders to seek debt relief measures. If you cannot repay the loans under the existing conditions, you must go to the bank immediately before your unpaid loan is classified as bad debt and subsequently marked with a bad credit rating.

If your loan is classified in the non-performing loan (NPL) segment, you can also ask the creditor for a relaxation of the debt conditions.

Before you go to the bank, you should have an idea of ​​the monthly payments based on your existing income and your debt repayment capacity. This is the advice of the Bank of Thailand to ease the excruciating financial burdens in a difficult situation.

DEBT SUGGESTIONS

There are eight methods of debt relief recommended by the Bank of Thailand, all of which fall under the central bank’s policy to ease the burden of consumer debt as long as the crisis persists, with financial institutions complying with the guidelines. .

An extension of debt repayment periods is the first recommendation. This is a popular instrument to facilitate monthly debt payment based on lower income.

For example, when a borrower has a loan agreement with a bank for 10 years and the borrower has paid off the loan for six years, but the virus outbreak reduces their ability to make existing monthly payments for the remainder of the loan. four years. In this case, the borrower can request to extend the remaining loan repayment period from 1 to 5 years in order to reduce the monthly debt service.

The creditor will also take into account the age of the borrower depending on the remaining term of the debt service. The remaining years of debt restructuring should not exceed eight years.

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

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

Under a grace period for the principal, a borrower is allowed to pay only interest at 12,000 baht per month, a measure designed to ease the financial burden on the borrower.

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

Banks will grant borrowers a grace period for major loans of 3 to 6 months, in accordance with the central bank’s debt relief measures.

If financial conditions improve, you can repay your debt by an amount greater than the monthly payment in order to reduce the capital. This method will also help you pay off that nasty debt faster.

The third option is interest rate cuts. Lower loan rates help reduce the financial burden on borrowers.

For example, when a borrower is charged the minimum retail rate (MRR) of 2%, but he / she cannot afford the rate because the income is reduced by the crisis, the borrower can ask the lender a reduction in the interest rate.

Basically, there are several factors that banks will take into account to reduce a customer’s credit rate. These include a borrower’s debt repayment record, type of loan, loan guarantees, and the bank’s financial cost.

As the monetary policy committee that sets the rates gradually reduced the benchmark interest rate to maintain the economic conditions affected by the pandemic crisis, this also helps to reduce lending rates from preferential interest rates, such as the MRR, the minimum loan rate (MLR) and the minimum overdraft. rate (MOR). On average, the prime lending rate has fallen by about 2 percentage points since the end of last year until today.

In addition, the regulator requires financial institutions to reduce the ceiling rates on credit cards, personal loans and car loans by 2 to 3 percentage points as part of the central bank’s debt relief measures. .

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

CONVERSION OF INTEREST

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

Fifth, the additional line of credit offers. In a context of economic slowdown and geopolitical uncertainties, working capital granted to small businesses is an instrument that helps them overcome the crisis. Clients who want additional lines of credit to support business liquidity should prepare for business feasibility plans covering the next 6 to 12 months for lender assessment.

For example, business operators should estimate their fixed costs, including salaries, raw material expenses, and utility costs.

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

The sixth tactic is to convert short term loans to long term loans or revolving loans to term loans.

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

For example, the 28% and 18% interest rate caps are applied to a small business operator who uses a charge card or a credit card loan. But when converting into term loans, the rates applied would be preferential rates in the range of 5.25 to 6.05%.

Debt refinancing is the seventh option. Borrowers using this method would get better loan terms, such as lower interest rates, but they have to pay a loan administration fee. Basically, borrowers can refinance an existing bank to a new bank after making a payment for the first three years and have a good repayment record.

Finally, you can close a loan account by paying off existing debt. You can escape the burden of your debt with this method if you are successful in raising funds by selling assets, borrowing from relatives, or using your savings. Negotiating with your creditor for some discount to pay off the debt can be done, but it is difficult if the value of the collateral is greater than the amount of the debt.

In the latest move to help debtors, the central bank announced a debt consolidation measure for retail debtors by allowing debtors to restructure debt by consolidating unsecured loans, such as credit cards. credit and charge cards, with mortgages.

The homes of the debtors would be used as collateral for this debt restructuring process. The measure only applies to those who have borrowed from the same lender.

Mortgages should not be classified as unsecured loans, while unsecured loans can be classified as defaulted loans or performing loans.

Interest on mortgages will remain unchanged, while interest on debt restructuring using debtors’ homes as collateral will be based on the MRR.

The extended debt repayment period will need to be negotiated by the borrower and the lender. The measure will run from September 1, 2020 to December 31, 2021.

DEBTOR’S ADVOCACY

Nathawan Chimthaworn, 34, a private company employee, said she asked Siam Commercial Bank (SCB) for lower interest rates on her mortgage after being affected by government foreclosure policy . With strict lockdown measures imposed to contain the coronavirus on national soil, the company, which organizes the events, was at a standstill.

Although she was receiving her normal monthly salary, the foreclosure policy had affected her overtime income. As a result, the amount of monthly income that she usually earns has decreased significantly.

Although SCB offers several debt relief measures such as debt cancellation and extended loan repayment, these instruments were insufficient for Ms. Nathawan’s actual needs. Lowering interest rates would help it ease the financial burden and ensure that it repays the debt normally.

She presented the lender with evidence of her lower monthly income, which weakens her debt service capacity under existing conditions. At the same time, she has also shown a good payment record over the past four years of installments.

“With a lower interest rate, I can service the debt normally while still being classified as a good customer,” she said. “If the situation returns to normal and I can earn more income, I plan to reduce the principal to shorten the payment period of the existing 20 years to reduce the risk of repayment in an environment of economic uncertainty.”

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