What is a loan?
A loan is an arrangement under which a lender allows another party the use of funds in exchange for an interest payment and the return of the funds at the end of the lending arrangement.
Generally when we speak about a loan we are referring to a sum of money that one or more people (for example a couple obtaining a house loan) or companies borrow from banks so as to financially manage planned or unplanned events.
Usury is the act of lending money at an interest rate that is considered unreasonably high or that is higher than the rate permitted by law. In Malta the charging of interest on loans in excess of 8%, is considered to be usury which is an economic crime.
How can you deal with debt?
If you have one or more debts, feel like your debt is spiralling out of control and /or are feeling anxious about your debts you need to:
- Take time to focus on your overall debts, breathe deeply and keep calm while you consider the overall situation.
- Gather all the information of your income, spending and bills (see planning a budget).
- Consider your available options.
- Devise a careful plan which deals with all the debt issues
You need to carry out the following 5 steps to do this:
1. Work on obtaining a clear picture of your finances:
You need to have a clear image of your debt, what you owe and what you can afford to pay. This can be done by making a list of all the money you have coming in and going out and of all your bills, debts and any assets you might have. Assets can include things like property, cash, investments, cars, boats, jewellery.
2. Deal with urgent and priority debts first:
Having a lot of debts can be very discouraging and extremely stressful. you might be feeling overwhelmed. Some types of debt are more important than others and need to be dealt with more urgently. It is essential to give priority to the more urgent debts and pay those off first.
Priority debts are debts such as mortgage (home loan) arrears, rent arrears, utilities, fines and maintenance payments. With these debts your creditors have extra powers to: repossess property, evict you, disconnect utilities or fine you. Home loan and rent arrears are extremely important because you could lose your home if you do not pay them.
Secondary debts are other types of debts where the creditor does not have extra powers, like eviction or utility disconnection. Although the consequences of not paying these debts are less serious they cannot be ignored as you can still be taken to court if you do not keep up with the payments. Examples of these can be credit card debts or telephony/ internet debts.
3. Find ways to improve your finances:
- Check whether you may be entitled to any benefits. You can do so by calling servizz.gov on 153, or by going to one of the Servizz.gov hubs.
- If you have a job you can also increase your income. This can be done by asking to increase your hours, asking for a raise, looking for a better-paid job.
- Asking other household members such as adult working children to contribute to the household finances.
- Sell your unwanted things
- Working part-time
- Turn your hobby into a source of income- if you make soaps or jewellery, crochet or sew you could earn money for your work. Remember it is important to carry out these type of activities in accordance with Malta tax and VAT regulations. You can learn more about this by following the ĠEMMA SME training or reading the resources found on our portal and confirming with Malta Customs and Tax Administration.
4. Think about how to deal with your debt
- Good money management may help solve your debt if you have enough income or can get more income to pay debts by making some changes to how you spend your money. One way to reduce or clear debt is to is by selling an asset. You need to consider the pros and cons of selling an asset, as some assets are a vital source of economic security. You may need your car to get to work for example.
- Voluntary arrangement- you may reach such a voluntary arrangement when you contact your creditors and negotiate an agreement to pay back your debt or debts over a period of time.
5. Starting with your debt-tackling action plan
If you have successfully completed the previous steps, you will have collected all your financial info and created a good money management plan. This plan is based on any improvements you can make to improve your situation.
You will have:
- Identified and dealt with any urgent actions needed
- Made repayment plans, where necessary especially with priority creditors
- Explored your tackling debt options
If you have missed or left incomplete some of the above steps, you should return to them and finalise them properly. Studying all the steps will help make the right choices towards finding the best solution.