If any of your clients is deep into debt, it is indeed a worry, however if they are not able to manage the situation well, it can lead to a bigger problem. Here are some effective tips for financial advisors to help their clients handle debt properly:
1. Give them a reality check
You have to first understand where your clients stand in terms of finances. If they borrow from family or friends to survive remaining few days of the month, use credit cards to take care of needs or take loans to purchase things or to go for expensive holidays, indicate to them that if they continue this practice, they are certainly headed for a debt trap.
2. Differentiate between good debt and bad debt
Explain to clients that debt can be classified into good and bad. For example, a home loan taken to buy a house which will increase in value in the future is good debt. On the other hand, debt taken to purchase an asset such as an expensive car or mobile which they can’t afford is bad debt since its worth will reduce over time. Caution clients to stay away from bad debt.
3. Help clients sort out debt
Financial experts must ask their clients to first collect all the documents related to loans and then calculate the total amount of debt. Keep in mind the due dates of all the EMIs and consider recurring payments on their utility bills. Arrange the loans in ascending order of interest rate. The next step is to tell clients to pay maximum amount for the debt which has the highest interest rate. They should pay the minimum sum outstanding on other remaining loans. Once your clients have paid off the highest interest rate debt, they should move to the second highest interest rate and continue this process till all debts are cleared.