Importance of risk management

Having a feasible repayment plan does not always ensure that you and your family will avoid financial pressure when a sudden incident happens while you have not fully completed your loan repayment obligations. That risk could be an illness, unemployment, or an accident that means you fall into a deadlock, even debt, or more debts. Therefore, fully considering of these risks and planning appropriate options (also known as risk management) will help you to be better prepared in terms of finance and spirit when taking out a loan or during its repayment.

RISKS FROM THE LENDER

INTEREST RATE RISK

If there is no specific regulation, changes in economic situation may cause an increase in the loan rate. (Fixed rates are usually higher than floating rates, but floating rates expose borrowers to risk if interest rates rise). This will result in changes to the interest payable to the borrower; this risk usually lasts for between 1 year and several years, so the borrower will suffer a lot of financial pressure and damage.

RISKS ON CONTRACT CONTENT

Consumer loan contracts are usually prepared by the lender and then signed by the borrower, so it is almost impossible for an individual to negotiate an adjustment or the borrower will often simply ignore or not read these terms carefully. These terms are of course to bind the borrower legally and guarantee the interests of the lender. When unexpected events happen, the borrower has no choice but to comply with the terms of the signed contract.

HEDGING PLANS

If the interest rate rises suddenly and is expected to be higher than the borrower's current rate of income growth, the following steps should be considered to solve the problem:

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Borrow from relatives and/or use up all your savings to pay off the remaining debt as soon as possible.

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If you do not have enough money to do that, you should review your and your family’s assets and decide which properties can be used as collateral (houses, cars, land, etc.) for the credit institutions. The purpose of this is to switch to a secured loan package with a better interest rate and enjoy a preferential interest rate for the first 1 - 2 years.

In order to avoid legal risks when taking out a consumer loan, before signing any loan contract, read the contract provisions carefully. PAY ATTENTION TO THE PROS AND CONS IN ALL TERMS. IF THE CONTRACT CAN’T BE MODIFIED, YOU STILL HAVE THE OPTION OF FINDING ANOTHER LENDER.

RISKS FROM THE BORROWER

INCOME RISK

This is when you are still repaying your loans but your income is significantly reduced or interrupted for a while (such as the prolonged lock-downs due to the Covid19- epidemic) or completely lost during for a period of time (unemployment).

For example, if Mai suffers from bad health and her income is suddenly interrupted for a while, or it is reduced due to having to follow a work- from-home regime (such as the prolonged lock-downs due to the Covid epidemic), or she completely loses it (unemployment), she would have to use her provisions. However, Mai should have a specific plan in place before the financial pressure becomes too great or out of control (late payments, for example, would result in penalties with an interest rate 150% higher than the prescribed rate, along with a history of bad debt that would affect any future loans).

HEALTH RISK

If during the loan term, you suffer from an accident or events that seriously affect your health and disrupt your earnings or make you lose your key source of income, you and your family will also face a lot of pressure from debt repayment.

INCIDENT PREVENTION PLANS

Assuming that during the loan term, your source of income is significantly reduced and may only last for a certain period of time, you could consider the following 4 steps to resolve the problem:

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USE SAVINGS

For example, Mai needs to buy a new computer worth VND 30 million right away so she will use the VND 10 million she has saved since she went to university.

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FIND SOURCES OF CREDIT

(relatives) or inherited sources with the same interest rate and where you can extend the repayment period.

At this time, Mai still needs VND 20 million, so she can ask her family or see if finance companies can give her more support.

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FIND A WAY TO RESTRUCTURE YOUR DEBT (you’ll need a credit advisor).

Mai can consult with a credit advisor to make a more scientific repayment plan based on a clear breakdown of loans by value, interest rate, and term.

Mai’s mother refuses to help Mai buy a laptop as she thinks that it is an unnecessary expense. Mai can contact a credit company for advice on suitable consumer loans for her case.

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SELL ASSETS TO SETTLE DEBT

If the loss of income persists and there is no plan to replace the whole/a part in the short term.

Mai finds that the more money she borrows, the higher the interest rate is that she has to pay. She decides to liquidate some of her valuables to minimize the loan.

To sum up, you should start by following a 5-step process to determine your needs and willingness to face financial pressures when taking out a consumer loan. As a result, you will acquire a clear view of all the risks and should find a suitable solution for your situation. In summary, if you have decided to choose a consumer loan, understanding yourself and understanding loan packages - the risks and the benefits - is extremely necessary for debt management in particular and financial management in general.