Finance

How to avoid bad loans

Debt is the amount of money that a person or entity owes, according to a definition by Merriam-Webster.

Debt burdens can be a major problem for individuals and businesses in Nigeria as they can lead to financial hardship and even bankruptcy. Increased adoption of e-payment system over the last few years, led to the emergence of more lending platforms. This also has given birth loan sharks that make it very easy to take loans without collateral and a spike in borrowing by many youths.

However, experts have linked the growth of heavy debt burdens to poor financial decisions while clarifying the pros and cons of taking loans and how it affects individuals both psychologically and financially.

Speaking with Our correspondence, the Led Coach, Financial Literacy with Temi, Mrs Temiremi Igboamagh, says the reality of finance is “money is never enough”.

Comparing the lives of high-income earners, she says that even the rich need a good financial plan, because no matter how much an individual has, it cannot buy everything.

Igboamagh focuses on the plight of business owners. She said, “Imagine adding increasing interest rate to your expenses. Everything increases including the cost of your loan. The only way I believe to avoid debt if possible is planning. And I don’t mean having a business strategy; I mean proper financial planning.

“For a business, you need a goal to show what your business is aiming to achieve. Then you have your budget and long term plans, with an estimate of how much profit you make (revenue) and how much you spend(expenditure).

She says, “After doing that, then you cut your clothes according to your size. The truth is any individual or business in debt, even the goad debt or loan is at risk because of the hike in interest rate.”

The chartered accountant and former consultant at Pricewaterhouse Coopers, Igboamagh explains that the inability to service a debt breeds trouble for the borrower.

She adds, “And that’s the problem a lot of people have at the moment. I am not talking about the loan sharks that call to threaten your grandfather in the village. I am talking about proper bank debt that is structured.”

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According to her, bad debts only get worse if not properly handled, especially with high interest because individuals sink deeper in more debts to handle pending ones.

A certified planner with Corporate Finance Institute, Igboamagh advises that anything individuals cannot afford after proper financial planning, “you need to let it go. That’s the only way unfortunately.

Personal Finance coach and Convener of the Boardroom, Kelechi Godfrey, highlights the excesses of what the current interest rate means for loan taking. He takes into account how the 17.5 per cent interest rate, makes it harder to repay loans. Godfrey tells individuals to take personal assessment on why there is a need to take a loan at the time.

He said, “Now there are different reasons why people take loans or go into debt. We are looking at healthcare, there is a kind of illness that can pop up to make people borrow.

“Another angle is lifestyle inflation.  Because you are the high fly, influencer and you want everyone to know you have arrived. You want to borrow money so that you have something to show off.

“One of the basic things that affect loans and debts is that people are not intentional. Some people don’t even know why they borrow money. They just say, I am down on cash. Let me look for where to borrow money- forgetting that when you take out a loan or go into debt it is more like surcharging your future. Taking money now that should come in the future for you to pay back with extra money as interest.

Godfrey notes that if individuals are not taking loans to acquire assets or multiply income, then there is no need for it.

“No matter how much you take, to solve a particular want not a need, it will still come up again.

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On the other hand Godfrey explains that taking loans is not the problem but the ability to refund the loan before the payment timeframe. He explains that assessing loan credit has become an easy venture, courtesy operators who dish out funds. However he says that, “the problem is not them giving you that loan, if you check most of the recurrent problems we have had is the ability to pay back the loan on time.

“But then again you taking that loan is there a sustainable plan to ensure repayment?

Godfrey said that the inability of individuals to repay loans is what prompts the rationale behind commercial banks not giving loans without proper documentation of the individual or business financial background.

He said, “Banks want to look at your statement. They want to know what you do for a living. They look at your income statement, recurrent pay cheque and the frequency of it.  But you see, a student who does not have a job, a side hustle, or any income source-taking a loan of N40,000,  N30,000.”

In an effort to pay back such loans, he said individuals turn to soliciting funds from friends and family or even more borrowing.

“Whereas if you were working you won’t be doing this to yourself,” he said.

He added, “It’s not taking the loan that’s the problem but the ease of paying back such loans. At least have four to five different ways to sort repayment. If I can’t pay through my job, I can pay through this or that to pay back. So it’s something we have to think off. And that’s why it looks like banks are always one step ahead. Once you plan on taking a loan they are actually looking at how frequently money enters your account so that they can start deducting it as it comes.”

Godfrey adds that a major problem for individuals is a lack of proper financial plan to pay back loans. He states that apart from loans, major financial decisions require a certain level of organisation and planning to mitigate emergencies or risks that might come up.

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He said, “The honest truth is everyone can repay their loan, the question is now when? I can take a loan and pay back in 100 years. So the problem is can you pay back the loan within the timeframe given to you? “

Thrive Financial Chief Executive Officer, Olayemi Olukayode, also advises on bad loans especially if an individual is already in a huge debt burden.

Olukayode said, “First you need to stop borrowing. Another thing is, when people have a debt situation they try to run away and avoid it. But I think it is important to sit with your lenders and have the difficult conversations. From renegotiating the terms of loan, because it is in the best interest of you and the lender that you pay back the loan.”

He says evaluating income is important because it might have led to the decision to borrow.

According to him, “What led you to such debt situation might have been a result of your low income or your expenses are above your income. At this point, you should be looking to increase your income. You might need a side hustle or getting a pay raise. On the expense side you might need to cut out unnecessary expenses.”

Generally, experts advise that if a person is unsure about a loan or need help managing finances, he should seek the advice of a financial advisor or counsellor; They can provide valuable guidance and help you make informed decisions.

In the end, bad loans can seriously affect a person’s finances. So it is important to take the necessary steps to avoid them. By doing necessary research, avoiding predatory lenders, considering alternative funding sources, and seeking professional advice, a person can minimise the risk and protect financial mental health and well-being.

Punch

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