Imagine a person who has taken a home loan for Rs 30 lakh, but suddenly meets with an accident resulting in a temporary disablement? He is unable to continue working and so there is a break in his income. He has not taken a personal accident insurance, and as a result is not compensated for this accident. He is not sure when he will start working normally again, which will give him the same income as his previous job to enable him to continue his monthly loan payment. What can be done in this case? Lets first look at what should be done before such a situation happens and how to stay prepared for it.
Building an Emergency Fund: As the popular saying goes ‘It is better to be safe than sorry’, it is important to build a safety fund for emergencies. The purpose of such a corpus is to help you deal with life’s uncertainties, of which a fall or stop in income is one of them.

You must consider all your expenses in a month to calculate the amount required for this fund. Experts generally recommend at least six months of expenses as the amount to be built as an emergency fund. This can even go up to 2-2.5 years of expenses, depending on your risk tolerance.

The corpus in this fund should only be used to meet the contingencies and not for regular expenses or on luxuries. It is better to keep a majority of this fund as liquid, to help you access the money without much problem. Remember, this can entail lower returns. Hence the amount to be invested in an emergency fund depends on what you perceive to be your risk level and the returns you expect on your investments. However, it must be kept in mind that the sole purpose of an emergency fund is to help you in emergencies and not to enhance your returns.

The higher the emergency fund, the better is your ability to deal with a crisis. The amount from this emergency fund can be used to pay your EMIs till you become fit to earn again.

Now what can be done after you realise you have uncertain cash flows?

Stay Calm: This situation cited earlier sounds scary, but anyone can be a victim of this. The first thing to do in such a case is to stay calm and think straight. Although it is difficult to manage your monthly cash flows, it is very important not to panic.

Talk to your bank: The next important thing to do is to talk to your bank or lender and discuss the issue. Get your loan papers in order and meet the bank officials. Banks generally understand such uncertainties and can re-work a loan repayment schedule, which takes into account your situation. You can either opt for lower EMIs or for a delayed repayment with some penalties or for re-financing the loan. These options will work out to be costlier for you over the long term; but they can provide you with the much needed breathing space which will ease your cash flows. The bank looks at your past repayment history, and will definitely entertain requests from genuine borrowers who have the intention to repay.

Cut out unnecessary expenses: Analyse your monthly expenses and cut out on all unnecessary expenses. In the normal course of life, when there is a regular income, we often spend on things which are not so critical or essential. Only when a crisis strikes, you can recognise these unimportant expenses and reduce or cut back on these. This will help you in paying off your EMIs more easily, as cash is freed up.

Avoid borrowing: Generally, when a crisis strikes, people resort to borrowing. Borrowing from banks may not be possible, as banks require payslips while granting a personal loan. If they know you are not working, they will not grant a personal loan. However, it is possible to borrow from other sources where higher interest rates are charged. This has to be avoided to the maximum possible extent, as this can be very harmful over the long term.

Talk to credit counsellors: You can also talk to credit counsellors who will help you deal with this situation in a better manner.

Events such as job loss, fall in income from a business venture, sudden illness, accidents etc. can happen to anyone, crippling your ability to meet your expenses and pay your debt. The situation calls for careful planning and methodically working out all possible options to manage cash flows efficiently.

— The author is CEO, BankBazaar.com

http://www.indianexpress.com/news/managing-emis-with-uncertain-cash-flows/1098295/0