In this article, JOSEPHINE OGUNDEJI writes about strategies for avoiding debt
Many need credit facilities to augment their incomes or executive projects. So, they approach lenders for support. At the end of the day, they find it difficult to repay the loans for one reason or another.
Defaults on loans result in damaged credit profiles, making it challenging for borrowers to access future credit facilities for personal or business needs.
Moreover, the adverse effects extend beyond financial constraints, potentially leading to reputation tainting and legal repercussions, such as asset seizures or bankruptcy proceedings.
This poses a severe setback to borrowers’ financial well-being and undermines their prospects for economic advancement.
Furthermore, the tightening of credit standards by banks, in response to the surge in non-performing loans, further restricts access to credit for individuals, particularly those from vulnerable socioeconomic backgrounds.
Bad loans, often referred to as non-performing loans, are loans that borrowers fail to repay according to the agreed terms, typically resulting in significant financial losses for lenders.
These loans can arise due to various reasons, including economic downturns, borrower insolvency, or poor credit risk management practices.
When borrowers default on their loan obligations, it not only jeopardises the lender’s financial stability but also disrupts the overall functioning of the financial system.
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 the e-payment system over the last few years has led to the emergence of more lending platforms.
This has given birth to 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 psychologically and financially.
Money is never enough
Speaking with The PUNCH, the Lead Coach of Financial Literacy with Temi, Temiremi Igboamagh, said the reality of finance is that money is never enough.
Comparing the lives of high-income earners, she emphasised that even the wealthy need a sound financial plan, as no amount of money can guarantee financial security.
Focusing on the plight of business owners, Igboamagh noted that the best way to avoid debt is proper planning.
She said, “Imagine adding an 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 by 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).
“After doing that, you cut your clothes according to your size. The truth is any individual or business in debt, even a good debt or loan, is at risk because of the hike in interest rate.”
The chartered accountant and former consultant at PricewaterhouseCoopers explained that the inability to service a debt breeds trouble for the borrower.
She added, “This is 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.”
According to Igboamagh, bad debts only get worse if not properly handled, especially with high interest rates, because individuals sink deeper into more debts to handle pending ones.
The certified planner with Corporate Finance Institute advised that if anything individuals cannot afford after proper financial planning, they need to let it go.
Personal assessment
Personal finance coach and convener of the Boardroom, Kelechi Godfrey, highlighted the excesses of what the current interest rate meant for loan takers.
Godfrey encouraged individuals to reflect on their motivations for taking a loan.
He said, “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 a 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 affects 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. “
According to Godfrey, borrowing money means using future funds prematurely, which requires paying back the original amount plus additional interest, essentially using tomorrow’s money today at a higher cost.
He noted that if individuals were not taking loans to acquire assets or multiply income, then there was no need for it.
“No matter how much you take, to solve a particular want, not a need, it will still come up again.
“Taking a loan is not the problem but the ability to refund the loan before the payment timeframe. “
He explained that assessing loan credit had become an easy venture, courtesy of operators who dish out funds.
He added, “However, the problem is not them giving you that loan, if you check, most of the recurrent problems we have had are with the ability to pay back the loan on time.
“But then, as you are taking that loan, is there a sustainable plan to ensure repayment?”
Godfrey explained that the inability of individuals to repay loans was what prompted 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, a 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 N30,000-N40,000.”
To pay back such loans, the expert noted that individuals turned to solicit funds from friends and family or even more borrowing.
“Whereas if you were working, you wouldn’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 it back.
“So it’s something we have to think of. And that’s why it looks like banks are always one step ahead. Once you plan on taking a loan, they are looking at how frequently money enters your account so that they can start deducting it as it comes.”
Godfrey emphasised that a significant challenge for individuals is the absence of a well-structured financial plan to manage loan repayment.
He further noted that this lack of planning extends beyond loan management, as major financial decisions require a high degree of organisation and foresight to prepare for unforeseen circumstances and mitigate potential risks.
“He said, “The truth is everyone can repay their loan, the question is, when? I can take a loan and pay it back in 100 years. So, the problem is can you pay back the loan within the timeframe given to you? “
According to Godfrey, assessing income is crucial because it often plays a role in the decision to take on debt in the first place.
He explained, “What led you to such a debt situation might have been a result of your low income or your expenses being above your income.
“At this point, you should be looking to increase your income. You might need a side hustle or a pay raise. On the expense side, you might need to cut out unnecessary expenses.”
Stop borrowing
The Chief Executive Officer of Thrive Financial, Olayemi Olukayode, advised that people should be wary of taking out loans.
Olukayode said, “First, you need to stop borrowing. Another thing is that 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 difficult conversations.
“From renegotiating the terms of the loan, because it is in the best interest of you and the lender that you pay back the loan.”
Seek financial counsel
Seeking guidance from a financial advisor or counsellor is a prudent step for anyone uncertain about loans or grappling with financial management. These professionals offer insights tailored to individual circumstances, empowering people to make informed choices.
With their expertise, individuals can navigate the complexities of loans, understand their implications, and strategise effectively to achieve their financial goals.
Ultimately, their guidance can be instrumental in safeguarding against the detrimental effects of bad loans, which can wreak havoc on one’s financial stability and future prospects.
Bad loans pose a significant threat to personal finances, potentially leading to a cycle of debt, stress, and diminished financial well-being.
Exercise caution
To mitigate this risk, thorough research is essential before committing to any loan agreement. This involves scrutinising terms, interest rates, and repayment schedules to ensure compatibility with one’s financial situation and goals.
Additionally, avoiding predatory lenders who exploit vulnerable individuals with exorbitant fees and deceptive practices is crucial. By exercising caution and due diligence, individuals can shield themselves from falling victim to predatory lending schemes that can exacerbate financial distress.
Exploring alternative funding sources can also offer viable solutions beyond traditional loans.
From crowdfunding platforms to peer-to-peer lending networks, these alternatives may provide more favourable terms and flexibility, reducing reliance on conventional loans. Furthermore, seeking professional advice from financial advisors or counsellors can offer personalised strategies tailored to individual needs, empowering individuals to make sound financial decisions and navigate challenges with confidence.
By embracing these proactive measures, individuals can fortify their financial resilience, safeguard their mental well-being, and pave the way for a brighter financial future.
