Coronavirus impact: Dos and don'ts of selling your assets to pay off debt
Dubai - With the sudden and unprecedented impact on incomes, countless people are experiencing financial hardship of varying degrees.
Deciding to liquidate your assets is not an easy decision by any means. But as the Covid-19 pandemic continues to leave a deep and profound financial impact on millions of people around the world, many will be forced to make this decision sooner than later.
With the sudden and unprecedented impact on incomes, countless people are experiencing financial hardship of varying degrees. Mass redundancies, pay cuts and involuntary unpaid leave have left people struggling to manage day-to-day expenses and other financial commitments. Add debt to the mix, and anxieties are at an all-time high.
So, does it make sense to liquidate your assets to repay debts and meet other financial obligations? This decision may be voluntary or involuntary, based on your personal financial situation. Let's explore the dynamics behind this decision, and the ideal way to go about executing it.
Review your personal balance sheet
Start with listing out your assets and liabilities in black and white. Preparing a clear snapshot of what you own versus what you owe is the first step towards deciding how to tackle adverse financial circumstances.
Start with liquidating low-yield assets
Remember that liquidating assets is often a decision of last resort and not one to be made lightly. 'Panic selling' in a market downturn can often erode the value of your investment significantly. It is best to start out with liquidating low-yield assets, which have been earning a low rate of return. Using the funds tied up in these assets to pay off high-interest debt, such as credit card debt, makes financial sense in the long run. However, be sure to strike a balance: You may have to rely on cash and these accessible savings in the near future, or at least until your personal financial situation improves.
Leaving the UAE? You may have no choice but to sell your local assets to repay debts
In the current scenario, many retrenched expat employees are planning to move back home to ride out the storm. But this move may not be a simple one, especially if you have outstanding debts in the UAE. For such borrowers, specifically, the decision to sell assets may have been made by default. Your bank in the UAE reserves the right to demand full and immediate settlement of your loans and credit card debt when you're leaving the country.
In case of unsecured debt such as personal loans, the bank may have the first right over your end-of-service benefits and gratuity, which can be offset against your outstanding loan balance. This can leave you in a bind, when the final employment benefits you were counting on to help you manage a few months' worth of expenses, are adjusted by the bank towards your loan. And to repay whatever's remaining, you may have to dip further into your savings.
What about other debts: Auto loan, mortgage?
You will have to sell your car and close your auto loan before leaving, too. However, in almost all cases, what you get back from your car sale proceeds will not be enough to cover your loan. So there goes another chunk of your savings.
The case of mortgage loans may be a bit different. As a property owner, you may be able to continue repaying your home loan from overseas. If you're able to show the bank that you have sufficient rental income to cover the mortgage installments, you may be able to strike a deal to keep your mortgage active long after you've left the country. However, you may have to agree to stricter terms and even a higher interest rate to factor in the additional risk being taken by the lender. With that said, not everyone may qualify for this arrangement. So, it is best to get your financial ducks in a row and figure out your plans to sell the property and settle the mortgage. But that's easier said than done. Your property may not fetch the price you paid for it in the current market, and worse yet, the sale proceeds may not even be enough to cover the outstanding loan amount. Yet again, your savings will take a big hit, as you scramble to meet the shortfall.
Therefore, it is important to have a solid emergency savings fund and readily accessible investments, to meet financial shortfalls like the ones mentioned above. And even more important is to have a plan of action in case it does come down to deciding which assets to keep and which ones to let go of.