Thank God I am not an expert on debt. Or of debt repayments for that matter!

The caveat first – I hate debt. I hate debt. I hate leverage. I rarely do an Options trade, nor do I ever buy a share in a Futures trade. All assets have been paid and bought.

Now let me ask you a question: “If a 49 year old man has a 3 lakh personal loan (at 21% p.a), a credit card debt of Rs. 100,000 (at effectively 42%), a car loan of Rs. 600,000 (at 14%), and a home loan (at 12.25%) of 34,00,000 – and he gets a ‘gift’ of Rs. 300,000 – what should he do?”.

The biggest problem in being an expert is you have to tell the customer what are the options available – and let him choose.

Let us look at all the solutions:

1. He should take a top up loan for the house (assuming he can get a top up loan of Rs. 700,000), use the gift of Rs. 300k and pay off all the non mortgage loans.

2. He should pay off the credit card loan of Rs. 100,000 and pay down a part of the personal loan. Mathematically it is the best solution because he his paying off the most expensive loan first.

3. He should pay off a part of the housing loan – after all the house is biggest asset and the biggest loan.

4. He should apportion the money amongst all the loans in equal amounts – over all he gets a feeling that every liability is getting reduced.

Now if you are a client what will you do? The planner in me has confused you fully and completely. Sometime later I will tell you the disadvantages of all of the solutions!

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  1. I don’t consider your solution no.1 as real solution, as the old man can do this, even without receiving the 3 L gift. But technically, I would rate this as the best solution. Not only mathematically this the best, but it gives the old man a satisfaction of having reduced the no. of loans from 4 to 1.

    I feel solution 2 is good. Also, this solution gives him the satisfactions of having lesser no. of loans (3 loans instead of 4).

    I don’t fully understand, why I would consider 3 and 4 solution. But that’s me.

    Also, why do you refer the 49 years man as OLD MAN. It scares me.

  2. 49 years old man?…….wake up guys……what u would call a 65 years old….a death man…LOL.
    BIG B lost everything went bankrupt at the age of 58…..and again a billionaire at 68.
    we are not BIG B, but there are fair chances that u can go bankrupt even at 58….sab kismat ka khel hai bhai saab.

  3. Guys,

    ’49 year old man’ above refers to the man’s age only and does not imply anything else. This is how I read it.

  4. A no brainer……… Pay off credit card,personal loan & car loan in that order. Keep housing loan —-“a good loan ” —–helps in asset creation

  5. yeah sukumaran i got your point, i totally agree english is a funny language….i used to score very less marks in my english paper in my school….now i understood why…LOL

  6. Staying with credit cards, sometimes a disciplined approach but with a small scar can also be lethal.

    I learnt this accidentally, but for those who have not learnt it yet, this might be something to watch out for.

    I usually pay off my credit card bills every month without having any due carried forward. Few months back, I noticed something unusual in my credit card statement. There was an interest and subsequent surcharge. The interest was around 3% on my purchase which I did before the earlier month’s bill date.

    But I also remembered that I had paid the complete due amount, so out of curiosity I called up the customer care and asked for clarification. I was told that I had a balance which was carried forward and hence the 3% interest, other charges etc etc.

    Just to cross check, whether the money which I had paid against my bill was taken into consideration at all, I asked him to explain. He told that the entire amount has been accounted for, but for 50 paise. The interest which was charged was around Rs. 1320 plus other charges. I was surprised about how much a 50 paise debit could cost me 

    To impress my surprise on the caller on the other side, I asked him a question in exclamation: “If (not allowed in my card, but assuming it did) I made a purchase of 1 Crore and repay 99,99,999.50 immediately, you would still charge me 3% on 1 crore? He did not wait a second to answer me “YES”

    I thought I was an idiot not knowing this, but when I told my project colleagues about this the next day, OMG 🙂 I was seeing their faces!! I am sure they would have started checking up their bills from thereon!!

    Not buying things on credit is a very good habit. But if it happens for certain reasons, paying off the bill at end of every month is a good habit. But every importantly, paying off every penny you owe is a SMART habit 🙂 I have already started becoming smart these days!! And yes, I have started going through my credit card bills line by line, for which I had no time before 🙂

  7. Actually I luv debt, especially in form of credit cards for few reasons:

    At 12 ‘O’ Clock midnight, God forbidden, something happens to my dear ones, unfortunately I was not prepared for such a sudden change of events (or have no mood to go to an ATM for withdrawal)..At that point of time in hospital, a credit card in my wallet becomes my friend, relative and more importantly my God 🙂

    I would not worry at all if some picks my wallet, without big cash but few credit cards in it…So my credit card in here becomes a secured money rather than luxurious key for shopping (without a purpose) 🙂

    With the above precious reasons backing up, the credit free period is only a supplement 🙂 [Which starts from the bill generation date and not from the date of purchase or transaction, which is usually a general misconception]

    Srini.

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