At some point in our lives, most of us experience a period of financial hardship. Our financial struggles are usually caused by some type of uncontrollable event. This would include the loss of a job or health problems. It could even be due to the tragic loss of a loved one who was the major income provider for the family. Unfortunately, these events are simply part of life and they can be incredibly stressful.
Many people are not financially prepared for these unexpected events. Therefore, it’s not uncommon for us to fall behind on our monthly loan payments. The most common loans are car loans, student loans, home loans and credit card debt.
If you find yourself in the middle of a financial storm, the worst thing you can do is ignore the problem. Unfortunately, ignoring the problem won’t make it disappear. The best course of action is to be proactive and develop a plan of action. Even if you are unable to make your monthly payments, there are a few simple steps you can take to help you survive the financial turmoil. Let’s review your options. Let’s assume you are falling behind on a car loan with your local bank.
Negotiate With the Bank
The first step is to contact your bank as soon as you find yourself falling behind on the car loan. The sooner the better. In fact, it would be best to speak with the bank within 30 days of being in arrears. It’s never a good idea to wait 2 to 3 months. The bank is much more willing to help you if you use a proactive approach. Many consumers are surprised to discover that banks are willing to negotiate during periods of financial difficulty. It’s in the best interest of the bank to keep you as a customer.
Essentially, you have three different options concerning bank renegotiations. The first option is to ask the bank for a 30 to 60 day deferral. This will allow you some time to organize your finances without the burden of making the car payment. The second option is to request a loan extension. In effect, a loan extension lowers your monthly payment. Your final option (and probably the best option) is to renegotiate a lower interest rate with the bank. A lower interest rate will reduce the monthly payment. However, it will not force you to make additional payments because the loan is not extended. Nothing changes with the loan except the interest rate. This explains why an interest rate adjustment is the best solution.
Consider Debt Review
Many consumers are simply unable to make additional car payments. If you find yourself in this situation, the best solution is to consider debt review. What is debt review and how can it help you?
Debt review (also known as debt counselling) is a program targeted at consumers who are over indebted and struggling to meet their finances. The National Credit Act (NCA) introduced debt review in 2007, in order to prevent consumers from being placed under personal administration.
Specifically, the debt review process involves a counsellor reviewing the client’s outstanding debt and implementing a repayment plan. The counsellor will contact the client’s credit providers in order to renegotiate a lower interest rate and extend the debt repayment terms.
Following renegotiations with the lenders, the counsellor will create a new monthly budget and payment plan for the client.
Many consumers prefer the debt review process because they are only required to make one monthly payment to a payment distribution agency. The agency is responsible for sending individual payments to each of the client’s credit providers. This reduces the client’s stress level because he/she is not required to send multiple payments to the credit providers.
As an added bonus, when under debt review, consumers are legally protected by the NCA against aggressive creditors contacting the debtor. Creditors are not allowed to interact with the debt review client.
All debt counsellors involved in the debt review program are required to be registered with the National Credit Regulator (NCR). Consumers can feel confident that they are dealing with a professional counsellor.
Should you consider applying for debt review? If you are unable to renegotiate with your lenders, debt review is a good solution. However, not everyone is eligible for the program. In order to qualify, you must be employed and earning an income.
Start an Emergency Fund
As we discussed earlier, most of us experience a period of financial hardship at some point in our lives. Very often, these events are uncontrollable and can strike without warning. The best course of action is to plan ahead for these unexpected events. A great way to prepare for financial difficulties is to start an emergency fund. What is an emergency fund and how can you create one?
An emergency fund is used to pay your monthly living expenses during periods of unemployment or illness. It can help you survive from a financial standpoint until you are able to begin working again.
How much money should you keep in an emergency fund? Although there is no perfect answer, a good rule of thumb would be to maintain a balance equal to six months of living expenses. This should be enough to get you through the difficult financial times.
The easiest way to create an emergency fund is to open a savings account with your local bank. Each month, make a small deposit into the account until you have saved six months of living expenses. These funds can be a real lifesaver when financial hardship enters your life.
Always remember, if financial difficulties enter your life, it’s always best to develop a plan of action. Follow the steps below to help you navigate your way through the tough times.
A Guideline to Help you With Financial Struggles
- If you encounter financial difficulties, don’t ignore the problem.
- Be proactive and develop a plan of action.
- Contact your bank within the first 30 days of financial hardship.
- Ask the bank for a loan deferral of 30 to 60 days.
- Negotiate with the bank for a loan extension.
- Ask your bank to reduce the interest rate on the loan.
- If you are unable to make additional loan payments, consider debt review.
- A counsellor will review your outstanding debt and implement a repayment plan.
- Your creditors are not allowed to contact you while in the debt review program.
- Creating an emergency fund can help you avoid a personal financial crisis.