Indians owe more. Reserve Bank of India data show that outstanding personal loans increased by 84% from Rs 1.955 crore in September 2018 to Rs. 35.98 crore in September 2022. . Possibly the most dangerous type of debt, outstanding credit card debt is also on the rise. Borrowers often fall into a debt trap and don’t know how to get out of it. Worse, they don’t even know they’ve fallen into a debt trap, and they realize the seriousness of the problem much later.
In such cases, a credit agency can help. In India, there have been a handful of credit counselors over the years, but there is no central database to know exactly how many. FREED’s entry there is a welcome step. FREED is a platform that helps people solve their debt problems. Launched by Ritesh Srivastava in August 2020 after returning from the United States, this online his platform is aimed at debtors who need to resolve their debt problems. FREED works with them, banks and other lenders to develop repayment plans so that individuals can pay off their loans and start from scratch. The purpose is to repay, not to seek forgiveness of the debt.
in exclusive storage with money control Kayezad E Adajania, Srivastava talks about how FREED is helping people get out of debt. Edited excerpt:
More and more people are borrowing money. The problem starts when they can’t pay back. How big is this problem really?
The ratio of household debt to gross domestic product (GDP) has ranged from 12-13% four to five years ago to 37-38% today. As the consumer side of our economy grows, so does borrowing and, ultimately, debt. Many people buy their phones and other consumables on a buy-now-pay-later basis.
According to our estimates, India’s total household debt is worth $1 trillion. Of this, 16% is unsecured debt, which is credit card or personal loans (which are not backed by any asset, unlike cars, mortgages, etc.). Of this $160 billion, 10% is the estimated default rate. In total, this means about $16 billion of debt is in default. This is huge.
How does debt counseling work?guide you through the process
When consumers approach us, we assess their financial situation and ability and willingness to repay. Our job is to help them resolve their stress and overdue debt and become debt free.
Let me be clear, this is not forgiveness of their debt. If they are in debt, they have to pay somehow, right?
That’s right. They must have the will and the money to pay off their debts and liquidate them. Our job is to program them how to do it in a reasonable amount of time.
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So what happens after you assess the customer’s situation?
We have set up a special trust vehicle. We work with one of India’s largest trust companies. FREED works digitally. Therefore, the account is opened digitally. After assessing a person’s debt, goals, and options, create a debt repayment plan based on income and expenses. We set up a fixed monthly transfer from their savings account to this trust account. The money is then paid out to the creditor from that trust account.
But this is more than just a deal. It’s a journey of transformation. Debt is a negative emotion. This is her one of the biggest reasons for divorce in the US and the leading reason for separation in India. It brings anxiety, uncertainty, depression, anger and frustration. And borrowers are in hell when debt collectors knock on your door, chase you, and in some cases harass you.In India, defaulters are a social stigma.
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FREED’s purpose is not just to eliminate debt for borrowers. From debt-ridden consumers to debt-free consumers, we hold them by the hand and make them aware of their rights as borrowers and what lenders can and cannot do. Educating consumers about what their rights are may help them to take care of themselves when a borrower’s rights are violated.
How long will this program run? Is there a time period you want the borrower to pay off all their debt?
A period of 18-24 months is reasonable. The structure of this program allows borrowers to save money each month towards their goal of being debt free. And as the money accumulates, we continue to settle their accounts. Basically, the debts are knocked out one by one. There is also a financial discipline ingrained in borrowers to save money each month throughout the process.
What if the borrower doesn’t have a job or loses their job? How are the funds sent to the trust account? Will they liquidate a portion of their investment?
We never liquidate their savings.
Our aim is not to provide loans to pay off loans. FREED is credit counseling that helps people use their own resources to pay off their debts. We also help them get out of debt quickly and systematically by liaising with their banks and lenders and making them aware of their rights and obligations.
But the underlying premise is: They need to have the resources and they need some kind of income to pay off their debts. How they do it is what we advise them.
Unfortunately, some borrowers may face further financial difficulties midway through or months after they enroll. remittance) will be arranged.
Unfortunately, if a borrower’s financial situation deteriorates to the point where they are unable to pay anything towards their debt-free plans and goals, they will simply drop out of the program. refund them. Since we did not provide any service (debt settlement), the money (trust account) goes back to the borrower.
Will your customer’s lender speak to you? Do they acknowledge your existence? Because you are the borrower’s representative, not the lender.
When a bank classifies a borrower as non-performing (NPA), it is sent to a debt collection agency. Typically, borrowers continue to avoid collection agencies. Followed by pursuit, persuasion and sometimes harassment. After 7-8 months, the debt collector may say that at best he can only collect 20% of his debt. So when he proposes a settlement of 40-45% of the debt, the lender will be happy to talk to us and consider the proposal. We have a solid track record with them.
It simply makes repayments on terms that are affordable to the borrower. If the landlord waits for you, that’s fine. Lenders may continue their own collection efforts. On average, a customer who comes to us has at least four creditors of hers. This means that one lender may want to talk to us while another may not. To date, no settlement offer has been rejected. Timing is important here, as it’s usually a matter of “when” rather than “if.”
What is the commission? I think it’s the borrower who pays the money, not the lender.
correct. Borrowers pay us. Because we represent borrowers, not lenders.
We charge a flat rate of 10% of the debt registered on the platform. We charge Rs 5,300 if we settle a registered debt worth Rs 53,000 on behalf of the borrower.
Many people laid off by startups were accustomed to high lifestyles. When their salaries stopped, it turned out they were in debt. Do you have such cases?
We have customers who have grown accustomed to prohibitive or expensive lifestyles. Also, incomes have fallen, making it difficult for many to keep paying. We have seen many such people living paycheck to paycheck because they have high hobbies and EMI (monthly installments). Much of their salary goes to paying off debt. And then there is the expensive lifestyle. As a result, you won’t save much, or worse, you won’t save anything. After that it’s a slippery slope.
In Bangalore, I saw many engineers taking pay cuts. But inflation is high. They get no relief from renting a house or EMI. They still have existing EMIs and unsecured personal loans or credit cards. It gets even worse when they start missing payments.
Three things I would advise young people in their 20s and 30s to keep their debts from running out of control.
Getting debt free can seem daunting, but with good financial planning and discipline, it’s actually achievable.
– It’s important to distinguish between needs and wants and check your monthly spending.
– Avoid over-borrowing, and if you’re already in debt, spend less and pay off your debts on time.
– If you find yourself in a difficult situation with debt, don’t be afraid to seek professional help.