If you are thinking about borrowing money, it is important to carefully assess your ability to repay. Failure to do so can lead to numerous challenges and difficulties with creditors, writes JOSEPHINE OGUNDEJI
The sad story of a 20-year-old student of the University of Ilorin who tragically took her life due to her inability to repay a debt of N500,000 incurred on some loan apps, highlights the crucial importance of doing thorough research before borrowing money. This is because defaulting on loans can be traumatic.
According to the report, the late Unilorin student wanted to use her loans for an affiliate marketing business, which ultimately failed.
Like this student, many people have fallen into the debt trap because they did not do their due diligence before taking out a loan. Many people fall into debt due to unrealistic promises of high business profits and excessive borrowing.
The sad story of the Unilorin student highlights the importance of careful financial planning and the need to focus on investments with a high probability of success, rather than risking uncertain ventures.
Many people turn to loans to achieve their goals, using them to fill financial gaps that might otherwise prevent them from realizing their aspirations. Whether it’s buying a house or a car, financing a wedding, starting a business, financing a trip, or pursuing a certain lifestyle that meets social expectations, debt often becomes a tool in the pursuit of fulfillment. Unfortunately, some people even resort to taking out more loans to cover existing debts, unintentionally locking themselves into a never-ending cycle of financial obligations.
In a world where the temptation of debt can be deceptive and appear as an opportunity for development, financial matters should be approached with caution and discernment. The key is not to avoid loans altogether, but to use them responsibly, always having a clear and realistic repayment plan. Every financial decision should be aimed at leading us to our desired future, free from debt and the risks associated with it.
According to Money Africa, loans affect people in the following ways.
The constant cycle of debt
This happens when you need to take out a new loan to pay off an existing one. You don’t want loan apps coming after you, so you end up taking out high-interest loans to pay off your current debts. Once you start down this path, it can be extremely difficult to break free because you will end up paying even more interest. This only provides temporary relief.
One of the most immediate effects of loans is the financial burden they place on borrowers. Monthly payments and interest can weigh on your budget, potentially leading to stress and anxiety.
Loans enable people to purchase assets such as houses or cars. This can improve your quality of life and provide a sense of fulfillment. However, it is important to remember that relying solely on loans can only provide temporary relief and may ultimately lead to a cycle of debt. The most prudent approach to achieving such goals is through careful saving and financial planning. Not only does this enable you to acquire the assets you desire, but it also helps you do so without the burden of excessive debt.
Emotional and psychological impact
The burden of financial obligations can lead to stress and anxiety, which has a profound impact on mental health. The constant concern about repayment and financial stability can gradually deteriorate your overall well-being. This confusion can have consequences that extend beyond your personal life. It can affect your productivity levels and results at work or in your company.
In some cases, it may even get to the point where employers are forced to make difficult decisions, such as firing you because of these problems. If you’re a business owner, mental stress can make it difficult for you to develop effective strategies to move your business forward, which could result in stagnation or decline.
Lifestyle and relationships
Loans can delay major life milestones such as marriage, having children or retirement. The need to pay off debt often takes precedence over personal goals and causes strain in relationships. Misunderstandings about how to manage debt can lead to conflicts within the family and between partners.
Career and opportunities
Some people may choose to take a higher-paying job they don’t like because they need to pay off loans quickly rather than pursue a career they are passionate about. The weight of debt becomes such that it forces them to put financial obligations ahead of their own passions. This can lead to years spent in a career that brings no joy or fulfillment, all because there are debts to pay off and bills to settle.
The fear of financial instability caused by loans casts a shadow over their career aspirations and influences the path they choose. This fear can discourage individuals, including potential business owners, from pursuing their entrepreneurial dreams and pursuing new ventures. This deprives them of the opportunity to pursue their passions and ambitions.
Money Africa noted that loans are a double-edged sword, offering opportunities while also imposing obligations.
To minimize the negative impact of loans, the finance company advised that it is extremely important to approach borrowing with caution.
“Understanding the terms and consequences of loans, creating a budget and seeking financial advice can help individuals manage their financial health and mitigate the potential negative effects of debt,” it said.
In an exclusive interview with HitDeloitte Canada finance expert Abdulmumeen Ridwan said it’s important to understand that there are different types of loans.
He said: “If you take out a loan, whatever you borrow it for should be something that will be profitable in the long run. If you need a loan for a short period and for your own maintenance, it is better to borrow from close friends and family.
Financial expert Leke Olushuyi, however, said that financial institutions in the country are not fully accessible when it comes to loans to low-income earners.
He said: “For example, if you borrow from a suitable financial institution, a bank, you will get subsidized interest per month, unlike a loan application which would give you an outrageous interest per month. In addition, in addition to the interest due, loan applications are subject to a default penalty fee which is added to the interest due and is charged on a daily or weekly basis. “
According to Olushuya, reputational damage can be truly condescending and ruin a person’s good name in the long run.
He added: “These loan applications are a way to get loans back from people and it can be really patronizing, especially for professionals who are building their character. I do not encourage borrowing from credit applications.
“The solution is to provide financial institutions (banks) with micro-lending facilities such as N20,000, N50,000 and N100,000, among others, which small business owners as well as individuals will have access to. That is why stronger financial institutions must serve low-income people.”
High default rate
Over the past few years, there has been a significant increase in the number of lending platforms operating in Nigeria. These apps have been specially designed to address the credit gap left by traditional banks in the country. Unlike traditional banks, these platforms do not require collateral or extensive paperwork to approve a personal loan or payday loan, which makes them increasingly popular.
Despite the popularity of loan applications, a significant number of them remain unprofitable. This is mainly because users find it difficult to repay loans due to low purchasing power resulting from high inflation and stagnant wages.
For example, in 2021, Kuda Bank suffered losses of approximately $6 billion due to a large number of non-performing loans.
“Kuda, a Nigerian neobank, lost N6,092,554,866 ($14,214,681) in 2021. This was largely due to bad loans, as their default rate was 69% compared to 4.8% for traditional banks.
“By the end of the 2021 financial year, the company recorded a loss of N6,092,554,866 ($14,214,681), an increase of 602% compared to the loss of N868,062,000 ($2,025,295) incurred in 2020. ” – stated in its financial report.
The microfinance bank’s financial statement shows that the company’s revenue increased by 4,315% from N72.65 million in 2020 to N3.21 billion in 2021. However, after deducting expenses, the company ended the year with a net loss, with high loss credit/impairment and operating costs that contributed most to the loss.
The high loan default rate is due to the fact that some borrowers believe they can avoid the consequences of loan default, such as harassment from these platforms.
The lending process in Nigeria involves multiple steps, starting with determining the loan amount to the user based on their credit profile. Financial institutions assess a customer’s credit history and loan repayment history.
According to an insider with six years of experience in the fintech industry, it is not enough for borrowers to repay their loans; it is equally important that they repay them on time.
Typically, the initial consequence of loan default is numerous messages and phone calls from the institution’s debt collection team. Some people deliberately ignore these messages and calls. Ultimately, these communications will cease when the loans are forgiven. Different financial institutions have different deadlines for reporting loans as bad.
There is a category of loans that become uncollectible and these organizations cannot continue to expend resources trying to contact customers. In most cases, these loans are covered by insurance, which allows institutions to effectively pay off customers’ debts and close their accounts without incurring significant losses.