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Fianacial Planning Cases
Use and Management of Liabilities
The fact that you have liabilities is not that big of a problem. If you make use of them wisely, even liabilities can be a good way of realizing your financial objective. For example, you can purchase a house or an urgent product using liabilities; in some cases, you can take advantage of an investment opportunity. If the liabilities exceed your repayment ability, or if they are within your repayment ability but they cause problems in cash flow as well as a deadlock in your financial status, however, your quality of life may take a turn for the worse and result in bankruptcy in serious cases.
What are the things we need to check before borrowing money?
If you don’t manage your liabilities properly, you may be faced with a difficult situation such as credit delinquency judgment. Consider the following points to judge whether to use liabilities or not:
1. Is the use of a loan reasonable?
You need to check if the loan’s objective is immediate consumption or house purchase and other long-term investment. In case of immediate consumption, you need to think about whether you will hold off on the loan or shun it altogether. If the purpose of the loan is long-term investment, however, you need to decide carefully after comparing the investment’s earnings with the loan amount.
2. Are the loan period and the repayment plan reasonable?
You have to check if the loan period and the loan’s purpose correspond to each other. If you avail yourself of a short-term loan even though the funds are meant for long-term use, you may experience a serious deadlock in your repayment plan. In addition, you have to decide between redemption by monthly installment and lump sum redemption at maturity. For this, you need to consider the specified interest rate for lending and its change.
3. Is the amount of liabilities reasonable?
A reasonable amount of liabilities differs by asset amount, investment type, income, and expense change per individual. If the total liabilities exceed 40% of the total assets, and if the amount of repayment of liabilities exceeds 40% of the total income, however, such is not considered to be a safe level.
4. Can you make use of your savings and installment savings?
In case you have savings or installment savings, you can put them up as collateral for a loan. Generally, however, the interest rate for a loan is higher than that of savings and installment savings. In fact, the gap in interest rate widens when tax is considered. Thus, you have to give careful thought as to whether you will borrow money using your savings or installment savings as collateral or whether you will cancel them to utilize the fund.
5. Have you exhausted all means of making the interest rate for lending lower?
If the loan’s purpose is house purchase or house’s lease fund, you can get an income deduction. Moreover, if you utilize the quota of the land of your own house rather than a general loan, the interest rate is lower. Some financial institutions provide various benefits including preferential treatment on an interest rate according to the business’s actual results. Therefore, you need to check if you made use of these methods properly.
What can I do to manage my liabilities properly?
According to the Bank of Korea, the balance of liabilities in the individual sector reached 492 trillion won as of June 2004, with the delinquent debtors numbering 3.7 million. Are you suffering from excessive liabilities? Don’t worry; you can overcome the economic crisis and control these liabilities by following a process, but there is no shortcut to freedom from liability.
Remember, considerable time and effort are essential if you want to be completely free from excessive liabilities. The following can help you reduce your liabilities:
1. Manage your income and expenses.
To determine where your income and expenses stand, record and review related factors.
Write down all income sources including salary, pension, dividends, and real estate’s rent in the first line. In the second line, write down all expenses. In particular, write down the main expenses including food expenses, transportation expenses, utility charges, and credit card expenses. At this time, be sure to include property tax and insurance fee, which do not occur every month.
2. Prepare a budget.
Prepare a budget to determine your monthly expenses considering all costs and minimize unnecessary expenses if you cannot get rid of them completely. For example, enjoy meals at home instead of dining out; use the video rental chain instead of going to the cinema and avoid any unnecessary dinner date. You can also use your credit card according to the usage plan and keep your receipts in case of expenses. Make sure you’re never overdue with your payments. Finally, when you prepare your family’s budget, make sure all the family members participate.
3. Increase the gap between your income and expenses.
Try to find a way of increasing your income and reducing your expenses by reviewing both. See if a family member can get a job or work longer hours or if your family can move to a smaller house or to a region where the rent is low. Check the unemployment compensation by employment insurance and rent of a national housing for rent. If you are a delinquent debtor, utilize a support system for credit recovery. If you qualify, you will get benefits such as repayment deferment, debt and interest reduction, and interest rate adjustment. You may visit the following websites for related information:
Korea National Housing Corporation
Employment insurance’s Internet service
Credit counseling & recovery service
4. Consult with the creditor.
Consult directly with the financial institution lending the money. Each financial institution changes the repayment method for a debtor or extends the due date. Some institutions perform the conversion of short-term loans such as cash service into a long-term loan and give loan repayment benefits to debtors who are not subject to credit recovery.
5. Seek the help of a professional.
You can get the help appropriate for your situation by turning to a professional. If you want help minus the fee, government programs or credit consultations with financial institutions are available. If you choose a professional individually, you can rely on the recommendation of an experienced person or a professional institution such as FPSB Korea.
6. Avoid a loan with a high interest rate.
Be careful, since there are cases wherein loan agents may require a more disadvantageous loan method than that of general banks. For example, loan agents apply the highest interest rate, taking advantage of the debtor’s urgent need for money, or get the interest rate in advance. Each financial institution’s loan interest rate can be compared at the websites of the Korea Federation of Banks and Korea Federation of Savings Banks .
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