Mortgage Protection: 6 ways to come out of a loan trap

‘Mortgage Protection’ refers to a life insurance plan, which covers for the default in a mortgage loan in the event of death of the borrower. This plan hedges the risk of loss, if the borrower dies during the course of the loan. This applies as much to an unsecured loan, as to any secured loan.

Talking of mortgage loans, this product becomes more important for the customer than for the lender. The lender has a security of the mortgage of the property, which can be invoked in the case of death and the resulting default. However, the borrower’s family would have a difficult time with the loan, should the death happen and there was no such insurance cover available to repay the loan. Yes, the lenders sell these plans to the customers and earn commission on the sales. But it makes sense for the customer to look at this as something that is meant for his / her benefit.

Under this plan, in case of any eventuality, the redemption insurance amount is directly paid to the lending institution by the insurance company. The money does not come to the nominee. Different types of mortgage insurance plans are offered by different insurance companies in India. The products are structured with single premium and multiple premium options. Typically, these are on reducing cover and the cover size is linked to the loan amount outstanding. The sum assured also reduces along with the liability as on repays the loan.

Be that as it may, what happens if someone is caught in a Loan Trap? A loan trap is a situation, where an individual keeps borrowing from the market. Typically what happens is he / she takes one loan. Thereafter, the income source from where this loan must be repaid gets dried up. Then the customer takes another loan from the market, which is used to repay the first loan. And then another loan from the market which is used to pay the second loan and so on. He remains in debt and this leads to a situation, which is referred to as ‘Loan Trap’. Trapped in the vicious circle of borrowing and repayment. It is worth an effort to know that such a situation could arise and take steps to manage that if at all anyone gets caught in it.

So, if at any point in time, if someone is found caught in a loan trap, he could consider taking the following steps:

1. If the situation is such that income revival is going to take some time, the immediate need is to cut down on wasteful personal and household expenditure. Many people hesitate to do it, thinking that this is a small step. But big things happen when many small steps are taken together. Think of all those extras – movies, restaurants, clubs etc. – which can be cut down but won’t affect the core of your life. Sitting and writing it down would help you come up with a list and which in all likelyhood could be substantial. This can surely help in bringing down your expenses by 5 to 10% in a month.

2. Overmanage your savings bank account: Keep only the bare minimum amount of money in your savings bank account. Whatever amount that you have as surplus over the minimum balance, invest them in alternate, higher interest earning investments. Even fixed deposits are a fine start as they pay more than the savings account.

3. Interest rate structure: Lending institutions have an automated process of resetting of your loan interest rates. And if you do not pay close attention, you may find that your interest rate might have been regularly going up and the interest rate that you are paying currently is far higher than what you signed up for in the beginning. The best thing to do then is to get your interest rate structure modified with the lender, by paying a one-time fee.

4. Build your credit score: The best and easy way to build your score is to ensure that your loan repayments and credit card repayments are always in time. Use your credit card in a very limited manner. For any expense that you incur pay in cash and limit the use of credit card.

5. Take up freelance work: You can always earn some extra money, however small it may be through some freelance work. Browse the net to find out avenues where you can get the type of work that you can deliver. Elance.com is a reliable site for doing freelance work and earning some money.

6. Above all, don’t let any form of depression eat you: It is important to keep oneself motivated and have a positive outlook to the future. Hoping for a better future and taking all possible steps to move towards it, would surely pay. It might test your patience in the short term or the medium term, but would surely benefit you in the long term. So, keep your chin up and look at things positively.
With a combination of the above steps, gradually, you can come out of the loan debt trap.

(About the author: This article has been contributed by Brijesh Parnami, CEO- Destimoney Advisors.)