Oct 10, 2019

Debt Advice is Not Financial Risk Management

People need debt advice when they already have a loan or more and are finding it difficult to repay. Debt advice is premature if one has no loan or unmanageable financial liability. Financial management is about how one must use their money to avoid debt. This is not what debt advice is as it pertains specifically to situations of falling behind on payments or repayments. Hence, debt advice is not financial risk management.

Debt Advice vs. Financial Risk Management

Let us consider two scenarios to understand the difference. If a person is planning to apply for a loan and has shortlisted a few propositions, then one must rely on financial risk management. This is the time when all the shortlisted propositions must be assessed, personal or individual eligibility and capacity to repay must be factored in, potential changes should be considered that can make repayment easier and subsequently the final steps should be chalked out. Debt advice is irrelevant at this stage. However, the very same approach to financial risk management becomes irrelevant if, in another scenario, a person already has a loan and is not being able to repay.

When a person defaults and there are unpaid installments for a loan, the individual borrower needs to explore relevant options. Financial risk management is no longer relevant because the approach should explore potential solutions. This may be debt consolidation and management. It could be renegotiating the repayment terms of the lender. Loan transfer is also an option. The risk has already come to pass in such stages so an expert who is aware of other prevailing rates of interest for the same type of loan among alternative but timely financial management strategies will have the best debt advice. Whether it is financial risk management or debt advice, specific awareness about rates, alternatives and the way out becomes the key.

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