BusinessDay

When debt hurts your personal finance goals

This week, I received about three text messages from loan companies, who keep sending broadcast messages to the supposed contacts of people who have borrowed from them and have refused to pay.

Interestingly, I do not even know the people whose names were mentioned in the text messages, so chances are these loan sharks (loan companies), send messages to as many phone numbers as they can, just to generally discredit the reputation of the defaulting people.

One of the questions people ask me from time to time is whether there are good debts or if all debts are bad.

Let’s first of all, take a look at what debt is.

Debt is literally an amount of money that is owed to another person; it is money that has been used to settle an obligation in the past and is due for repayment in the future.

Each time you borrow, you are putting a charge on a future income that you have not earned, or that you are not sure of earning.

You are also stifling other profitable opportunities you could use your future money for since you have to pay an obligation from the past.

Research says that 8 in 10 Americans have some form of consumer debt, and whilst I do not have readily available information on consumer debt statistics in Nigeria, there has arguably been an increase in consumer debt borrowing in recent times.

Borrowing money has become a common phenomenon in Nigeria, because of the ease of access to loans. These loans, however, come with high-interest rates and unfavorable repayment terms, and a lot of people leverage those credit opportunities with little or no knowledge of the consequences.

Here are a few reasons why loans have become more popular in Nigeria:

-There is an increase in peer-to-peer lending platforms and pay-day loans which do not usually require an extensive credit check or collateral.

-Loan services are now readily available through fintech companies, and they can be accessed without involving financial institutions.

-Increased advertising on social media puts pressure on people to make purchases they can’t afford.

-Debt products are being provided by banks with relatively low requirements to access them.

Does the ease of access, occurring as a result of the factors explained above, make debt a desirable option to meet urgent or day-to-day financial needs, or augment income-bills deficit?

Consumer borrowing occurs in personal finance when a person’s income is not enough to cover their expenses, and they have to find a means of augmenting that difference.

That deficit, or excess of expenses over income, spells danger for your finances, as ideally, your income should adequately cover your expenses, and leave room for a surplus for savings. But most people find themselves in a deficit, sometimes because their bills are more than their income or because they have not mastered the judicious use of their resources.

Read also: Financial inclusion: What Nigeria can learn from Ghana

Still, this doesn’t justify taking on debt or borrowing.

While debt may arguably come in handy in some cases (not advisable), it is not to be adopted as a way of life.

-Debt debilitates; it becomes even more exhausting as you continue to pile one after another.

-Debts are tricky and could be very inundating especially when the debt doesn’t offer any long-term benefits to the borrower.

When your income doesn’t adequately meet your bills, exploring ways to augment your income is better than resorting to debt.

I have seen people borrow money to finance weddings, buy cars, and go on vacation, among other things that are not deemed necessary for their survival.

It is advisable to:

Avoid borrowing for consumption purposes.

Resist the urge to borrow money to purchase items that will depreciate.

Avoid borrowing money to purchase items that seek to “validate” your societal status.

Avoid borrowing money to start a business (especially when the viability of the business has not been ascertained).

Avoid living in debt.

As much as I am not an advocate for leveraging debt for personal needs, I must admit that there may be instances in which debt may be an option to consider. Some people may call it good debts.

Debt may come in handy to help you reach your goals: for example, to pay for your education, purchase a house, or leverage an investing opportunity. In the western world, debt is encouraged for people to build their credit scores.

Even at that, leveraging debt must be handled with caution.

Review your finances, talk to a financial advisor if possible, and get counsel before you get into any form of debt.

Have personal financial goals and let them motivate you into maximizing your resources at all times.

Embrace financial literacy and keep gaining knowledge on how to manage your finances.

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