How to manage loans when you lose your job

Sell unwanted assets, get out of costly loans, get out of assets generating low returns and negotiate with your bank, says experts.

At certain times in life you need to take difficult decisions. In situations like the present one when there have been lot of job cuts you need to take these decisions. Financial planners say that you should be geared up to face such situations. What should you do if you find yourself in a similar situation?

1. Assess your financial condition

You should assess your financial condition. This includes how much liquid cash you have? What is the amount that you have invested across various asset classes and what returns are they generating?

Do not forget to take into account a possible source of money like the provident fund or the gratuity. You are entitled to a gratuity if you have worked in a company for at least five years.

According to the present rules if the gratuity amount is up to Rs 3.5 lakh, then it is tax-free. You can get your provident fund money within 2 to 3 months after leaving the organisation.

Once you have analysed your situation, you are set to take decisions.

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2. Choose between the loans

If you have taken several loans but do not have the ability to repay all of them you need to make a choice regarding which one to pay first. In fact, most bankers are recommending this at the present moment.

According to financial planner Milind Rai, if you have an auto loan and a home loan, it is better to continue paying your home loan since real estate prices do not go down immediately.

3. Sell off assets generating low returns

Also, in such times of distress you should consider selling off assets like your car. You should also look into the investments you have made to find out if they are generating enough returns.

In case there is an asset that is not giving as much return as the interest rate you are paying on the loan, it is wiser to liquidate that asset. You can also think of switching asset classes such as shifting from an equity growth plan to equity dividend plan.

Most financial planners say that your equated monthly instalment (EMI) at any time should not exceed 40 per cent of your income except in certain cases when it can go up to a maximum of 50 per cent.

4. Inform your bank

Keep your bank informed about your financial condition. Renu Sud Karnad, joint managing director, HDFC says, "The options which have always been available are increasing the tenure of the loan (which means that the EMI will remain constant for the moment) or making certain lump sum payments or accelerating the EMI or a combination of these options."

Banks suggest different corrective measures for different cases. Banks may also ask you to sell off an asset. Selling off an asset is definitely better than defaulting on your installment and forcing recovery agents to chase you.

However, it is important to be aware of the fact that there is no set formula for every situation you face in life. It varies from case to case. You should trust the financial experts when they advice you to be clear and careful in your thoughts. You should be willing to sacrifice an asset if the experts suggest you to do so in order to drag you out of the difficult situation.