Ramkumar has been having sleepless nights for the past week.

His personal loan application form was turned down by a bank, last week, and he could not find any other source of money to pay his forthcoming monthly payments.

The problem

The problem that Ramkumar faced did not occur overnight. He is a 38-year-old, well-paid executive with a post-tax monthly income of Rs 1.8 lakh (Rs 180,000).

However, he has also been spending more than his income for the past three years.

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Home loan: Currently, he has been repaying a housing loan for Rs 75 lakh (Rs 7.5 million) at an EMI of Rs 64,000. This loan was taken five years ago and has 20 years more to go.

Vehicle loan: Ramkumar also has two car loans (one for him and the other for his wife) together take away Rs 20,000.

One of the car loans will be over in the next three months (Rs 6,000). The other car, which is one year old, has a loan that runs for the next four years.

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Expenses: Apart from this his two children's school fees is on an average Rs 20,000 monthly.

His health club and other personal expenses add to about Rs 30,000 monthly.

The family running expenses and weekend outings add up to Rs 45,000 monthly. The medical expenses for his parents who live with him add up to Rs 5000 per month.

Credit card and personal loans: He is also servicing his credit cards (3 of them) to the tune of Rs 20,000 monthly where the total outstanding is Rs 4 lakh (Rs 400,000).

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He has personal loans from 4 different banks of varying values to the tune of Rs 10 lakh where the total EMI is close to Rs 30,000.

These loans will run varying terms starting from 6 months to 3 years for their closure.

For the past 1 year, he has been able to draw on his credit cards to meet his additional monthly expenses. However, the credit card limits have been reached on all the cards.

He had applied for a new credit card. However, the application was turned down last month. To tackle the problem, he applied for a new personal loan. Sadly, his loan application too was rejected.

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A financial planner's perspective of Ramkumar's situation

On analysis, it can be seen that, Ramkumar has a surplus -- if accounted for his budgeted income and expenses related to his family and good loans.

These (the school fees, his personal expenses, parent's expenses, the family expenses and the home loan,) add up to Rs 1.64 lakh which leaves a surplus of Rs 16,000 monthly (salary being 1.8 lakh).

However accounting for all the other 'bad' loans Ramkumar is in deep trouble to the tune of Rs 54,000 monthly over and above his income of Rs 180,000 (a total of Rs 234,000 monthly expenses).

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Other assets

Ramkumar and his family have a few assets too. He owns an ancestral property at his native place worth Rs 25 lakh (Rs 2.5 million). His father gifted this property to him.

A rent of Rs 3,000 is received from this property on a monthly basis. His wife has jewels worth approximately Rs 15 lakh (Rs 1.5 million) -- 100 sovereigns.

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Can Ramkumar survive the debt?

Debt management the way out: Not all is lost for Ramkumar. By controlling the budget and by good debt management principles, he and his family can lead a debt-free life.

However, this requires some consistent and determined efforts from all in the family.

The first step in this process will be to switch to lower cost debt (lower interest rate). The second step will be to even temporarily, reduce the required cash outflow per month. (Remember there is a deficit of Rs 54,000 every month).

Fortunately for Ramkumar, both these are possible if he goes for a jewel loan. He can get about Rs 960,000 as loan from this.

He can then use the money to clear off the credit card debt, the car loan that is nearing closure and three of the personal loans.

The other car loan can also be partially pre-closed to the extent of about Rs 145,000.

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The advantage with the jewel loan is that, only the interest needs to paid on a monthly basis and that the interest rates are the lowest among the loans.

However, he needs to take care that the jewel loan is taken from a bank and not a pawnshop or some of the private jewel loan providers. This is because pawnshops and private jewel loan providers charge a higher interest rate usually 1.5% per month (18% per year compounded monthly); compared to banks, which charge only about 10% to 12% per year.

Post this rejig, there is a reduction of monthly outflow of Rs 49,000.

There is, however, an additional cash outflow of Rs 9,600 to be paid monthly for the gold loan. This additional cash flow and the balance excess expense has to be managed by reducing the personal expenses of Ramkumar and from the family expenses.

Managing to reduce Rs 15,000 from a total expense of Rs 75,000 is not easy.

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However, this is a necessary sacrifice that the family has to undergo for some time.

By taking his action, the income and expense per month for Ramkumar is balanced. His credit cards are free. He will have only one personal loan and a partial car loan. His housing loan will continue as usual.

Closing the jewel loan and housing loan

Till now Ramkumar has only shifted his loan from one type to another. Now comes the task of closing off all loans and leading a debt-free life.

This can be done by reducing the jewel loan and the housing loan principals by making partial payments from any surplus income like rental from the ancestral property or a bonus or a salary hike.

He can also look at a home loan refinance offer from competing banks.

This way Ramkumar will be able to be debt-free in an estimated 10 years of tight management of expenses and prudent partial closure of loans.