How to manage a commitment?

When is it justified to take a loan?

The availability of various credit products can tempt individuals to take on liabilities that may become challenging to repay with their current income. Alongside the risk of accumulating excessive debt, loan repayment can be complicated by miscalculated risks during the borrowing process or unexpected issues arising during the repayment period, such as a significant reduction in income.

To ensure sound financial decision-making, it is essential to effectively manage any loans taken. Loans can be categorized into two broad groups: those that generate additional value, such as purchasing a house, land, car, or financing education, and those that do not yield additional benefits, such as loans for daily expenses or travel.

Taking a loan that leads to the creation of additional capital is generally considered a justified decision. However, loans in the second category can also be wise if approached with proper calculation. For instance, if you work in the field of art and decide to enhance your qualifications through a loan, it can be considered justified. Conversely, taking a loan for a field unrelated to art or your future activities, such as studying accounting, may not be justified or effective.

A justified loan can also encompass obligations that do not create additional value but do not negatively impact your financial situation. For example, if you take a loan to purchase a new car model while still managing to save and maintain your standard of living with sufficient income, it can be considered justified. In essence, a justified loan is one where you have carefully analyzed the risks and opportunities associated with borrowing, ensuring that it will not worsen your quality of life and may even enhance it. It is crucial to conduct a comprehensive assessment of all the potential risks and opportunities before making a loan decision.

How to manage liabilities?

Effective loan management is crucial, regardless of whether you are experiencing difficulties in meeting the repayment schedule outlined in the loan contract. By taking thoughtful actions, you can navigate your commitments responsibly and improve your financial situation.

Calculate how much you can service the loan

When applying for a loan, lending organizations assess your creditworthiness to determine whether they can grant you the loan based on your financial situation. However, their calculations primarily focus on the risks for the lending organization. To understand your own ability to take on financial obligations, it is recommended that you assess your financial capabilities independently. The most effective way to do this is by reviewing and analyzing your personal and family budget. By examining your income, expenses, and financial goals, you can gain a clear understanding of what financial obligations you can comfortably assume.

Make a budget plan

When considering taking out a loan, it is crucial to recognize that it will require periodic payments to repay the loan amount. To ensure that the loan payments do not become an excessive financial burden, it is important to assess whether you can accommodate the additional cost within your budget before proceeding with the loan. You should calculate your fixed income, compare it with your expenses, and determine how much you can save each month. Only after considering these factors, you can determine if you have sufficient available funds to cover the monthly installments and ultimately repay the loan in full.

If taking out the loan is of great importance to you, such as purchasing a necessary car for commuting to work, you may consider adjusting your expenses and reallocating funds to accommodate the loan repayment. It is essential to prioritize your expenses and identify areas where you can cut back, ensuring that the freed-up amount is sufficient to cover the loan servicing. Conducting this analysis of your budget will enable you to accurately assess whether you can fulfill the loan obligation without facing financial difficulties based on your income and expenses.

Save at least a little bit of money

Saving money alongside loan payments and other current expenses is crucial, and having a well-prepared budget can assist you in this endeavor. Even though your expenses may increase during the loan repayment period due to the loan installment, effective planning can enable you to save money. It's important to recognize that even saving a small amount can have a positive impact on your financial stability. Building up savings serves as a "safety cushion" that can be utilized to cover unforeseen expenses, helping you avoid unexpected borrowing and additional liabilities in the future.

In case of problems, contact the lending institution

If you find yourself in financial trouble during the loan repayment period, or anticipate difficulty in paying the loan installments in the future, it is important to contact the lending organization and inform them about your situation. Addressing the issue together at an early stage can lead to finding a solution more easily.

Loan consolidation:

Consolidating multiple loans into a single loan with a single lender can make loan repayment more convenient.

Loan restructuring:

If your income is no longer sufficient to cover the loan installment amount, it is crucial to consult with the servicing financial organization. As a potential solution, you may consider loan restructuring, where the loan term is extended to reduce the monthly payment amount. However, it's important to note that since a restructured loan carries higher risk, the financial institution may increase the interest rate.

Make a list of creditors

When managing multiple loans, it is crucial to keep track of important details for each one, such as the loan amount, payment dates, installment amount, outstanding balance, and whether the interest rate is fixed or variable. Creating a list of creditors will provide a clear overview of the individuals or organizations you owe money to, the respective loan amounts, and prioritize which loans require more attention or are of higher importance. This will assist you in effectively allocating your income and managing your loan obligations.

Do not add to your debts

If you are facing difficulties in repaying your current loans, it is generally not advisable to take out a new loan to cover the loan installments. Taking on additional debt will only increase your expenses in the upcoming months. It is important to prioritize your financial stability and ensure that you have the ability to comfortably repay any new obligations before considering taking on more loans. It is wise to assess your current financial situation and explore alternative solutions, such as discussing repayment options with your lenders or seeking financial advice, rather than increasing the size of your loan burden.

Stop using revolving loans

If you are struggling to accumulate enough funds between loan installments, it may be an indication that the loan amount is becoming challenging for you to repay. In such a situation, it is crucial to closely monitor the utilization of revolving credit, such as credit cards and overdrafts. To adhere to the regular payment schedule, it is important to refrain from increasing the loan amount further. It is advisable to avoid taking on readily available and renewable credit in order to maintain financial stability and avoid additional debt. Prioritizing responsible borrowing and managing your existing loans effectively will help you maintain control over your finances.

Make a loan repayment plan

Determining the order and methods of payment for existing debts is an important step in managing your loans effectively. If you have multiple loans from different lenders and are establishing a repayment plan, you can choose between two common methods:

“Snowball” Method:

Under this method, you start by paying off the smallest loan first. Once the smallest loan is fully paid off, you move on to the next smallest loan, and so on. This method provides a sense of accomplishment as you eliminate individual loans and can help motivate you to continue paying off larger loans.

“Avalanche” Method:

Contrary to the snowball method, the avalanche method prioritizes paying off loans with the highest balances first. You begin by tackling the loan with the highest volume and interest rate. Once that loan is paid off, you proceed to the loan with the next highest balance. This method can save you more money on interest payments in the long run.

When choosing a debt repayment method, it is important to consider the specific details of each loan. If you opt for the snowball method, analyze whether the interest fees on larger loans outweigh the benefits of paying off smaller loans first. Conversely, if you choose the avalanche method, ensure that you don't have any small loans with significantly higher interest rates, as they may end up being more expensive in the long term.

Carefully evaluating your loan terms and considering your financial situation will help you determine the most suitable repayment method for your needs.

Understand your rights and responsibilities in the debt management process

It is crucial to have a clear understanding of your rights and responsibilities as well as those of the lending organization, even in challenging situations. When a loan becomes overdue, it typically incurs penalties, and these additional costs are specified in the loan contract. It is your responsibility to thoroughly review the terms of the agreement, including the provisions related to financial costs, at the time of taking out the loan. This will enable you to verify whether any overcharges have been applied when assessing the penalties. If you encounter any issues during the loan management process, you have the option to contact the National Bank of Georgia for guidance and support.

It is important to note that the authority of the National Bank extends only to the organizations under its supervision. If you fail to comply with the terms of the loan agreement, such as not making timely payments, the credit organization may request that you fulfill your obligations or even repay the entire loan amount. The rights of the financial organization in such cases are explicitly outlined in the loan agreement. It is important to consider that non-payment of the loan not only impacts you but also affects other parties involved in the loan, such as guarantors, co-borrowers, and, in the case of secured loans, the individuals whose real estate is used as collateral.

Properly manage the relationship with those who contact you about the overdue loan

When a loan becomes delinquent, the process of managing the loan repayment may either be handled by the lending organization itself or outsourced to specialized entities. To ensure the protection of your rights when dealing with a delinquent loan, it is important to thoroughly understand all the details outlined in the loan contract.

Communication with specialized companies

When dealing with external entities involved in the management of delinquent loans, it is important to approach the communication process with caution. If you find yourself interacting with specialized companies responsible for collecting overdue loans, it is advisable to seek legal advice beforehand to understand the nature of their requests and what to expect from them.

It is worth noting that organizations involved in the management of delinquent loans are subject to regulation by the National Bank of Georgia. As of January 1, 2019, any entity with debts owed by more than 20 individuals is required to register as a lending entity and operate under the supervision of the National Bank. This regulatory framework ensures that certain standards and guidelines are followed in the collection process.

If you have concerns about your rights or need further clarification, you have the option to reach out to the Customer Rights Protection Department of the National Bank for assistance and guidance. They can provide valuable information and address any questions or issues you may have related to your rights as a borrower.

Payment agreement and negotiation process

In certain situations, you may encounter requests from employees of specialized companies to deposit money into an account or receive warnings about the possibility of legal action to recover overdue loans. It's important to recognize that an unpaid loan is indeed your personal obligation that you are responsible for repaying. If you find the payment process challenging, it is recommended to reach out to the lending organization at an early stage and explain your current situation. Both the borrower and the lender have a shared interest in ensuring that the loan is repaid successfully, so the lending organization will likely make efforts to assist you if you cooperate with them. The key is to approach the negotiation and agreement process regarding payment arrangements wisely.

If a specialized organization proposes a new payment schedule for settling overdue loans, it is advisable to request the key details, such as the payment amount, payment schedule, repayment deadline, and other pertinent information, to be documented in a formal agreement. Verbal agreements can be challenging to protect and monitor effectively, whereas having a written agreement makes it easier to review and adhere to the agreed-upon terms in the future.

Relationship with the court

When it comes to resolving disputes through court or arbitration, it is common for customers to feel apprehensive about pursuing legal action. However, it's important to recognize that the court or arbitration process can provide a fair and impartial decision based on your rights. Therefore, it is not advisable to view court proceedings as the worst-case scenario or to agree to unrealistic demands simply to avoid legal action. Instead, you have the right to present your arguments and reasons for facing difficulties in repaying the loan to the court. You can also request an adjustment to any excessive charges that have been imposed on you. Additionally, you have the option to request the court's assistance in negotiating a payment schedule that is more suitable for your circumstances.