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Loans: The Noose Around Your Neck

By Amit Bhanot | 10/11/2010 3:34 PM Monday

Case 1: Amit Tiwari, working as a marketing manager with a top media company, was recently shell-shocked to receive a call from his credit card company’s collection department. In a very hostile manner he was told that he had defaulted in the payment of dues accumulated against his card and that he owed Rs 1 lakh to the company. In fact, he was also warned in no uncertain terms that he would be hauled off to the court if he did not cough up the dues immediately.

Quite perplexed with the situation, Amit tried quite a number of options but failed to obtain the needed funds to come out of this mess. That’s when he did what most people do when pushed into a corner. He applied for another credit card with a limit of Rs 1 lakh to pay the dues of the first one. He managed to temporarily resolve the problem but now his outstanding payments for the second card have already crossed Rs 1.80 lakhs and with just Rs 30,000 per month as his take-home salary, Tiwari is at his wit’s end in trying to clear this financial mess.

Case 2: Top IT executive Rohan Singh (name changed) was always one of those astute investors, judiciously building his portfolio and making sure that it was well-diversified with a wide range of products. Till the end of 2007 he was considered one of the best managers of surplus funds among his colleagues. However, this planned approach went for a total toss during the meltdown phase. What happened was that with a take-home salary of  Rs 1.10 lakhs per month he purchased a house for him-self and then booked another flat at a price of  Rs 30 lakhs in an already booming market in mid-2007. The gross price of these houses totalled Rs 75 lakhs for which he had taken an aggregate loan of Rs 55 lakhs at 11 per cent floating interest on which he was paying EMIs of around Rs 75,500 per month.

Everything sailed smoothly for many months but the real problem started when the financial meltdown hit the globe. The IT sector was among those that faced the primary brunt and Rohan’s salary was slashed by a whopping 20 per cent that brought his take-home down to Rs 88,000. Now after deducting Rs 75,500 of EMIs (equated monthly installments) he was left with just Rs 12,500 per month while his monthly expenses worked out to Rs 30,000. Surely he was in a trap. Left with no option he decided to sell the second house but in a lean market the value he got was just Rs 22 lakhs, implying a clear loss of Rs 8 lakhs.

These two cases are perfect examples of a situation generally termed as a ‘debt trap’ wherein the income of a person falls short of his out-flows and he/she finds himself in a situation that is traumatic both in the financial

 

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