• Monday, May 27, 2024
businessday logo

BusinessDay

What do when you are in bad debt

businessday-icon

Unlike in the Western world where you have to buy almost everything on credit, we live in a society where you have to pay upfront for most of the things you buy. Yet it is impossible for an average Nigerian to stay out of debt. However, debt is not an uncommon practice in every society.

We have heard of nations, like ours, borrowing money from World Bank. We have heard of corporations borrowing money for large purchases that they could not afford under normal circumstances. And so have we heard of individuals who are in debts. While good debt can be a form of leverage for those who understand how it works, bad debts can destroy those who do not have the understanding of it.

Good debt is the money borrowed by a party from another with the intention of investing it, making returns on investment through cash-flow or capital gain and with a proper system of paying back the debt over a given period of time. Large

Corporations and business owners with well structured system or management most times enjoy these facilities from financial institutions and other sources. Most employees working in well structured organisations also enjoy loan facilities. But a good debt can turn out to be a bad one if the management fails or an employee loses his or her job.

On the other hand, bad debt is when a party borrows money from another without the intention of investing it for cash-flow or capital gain and with no proper system of paying back the debt regardless of the agreed period of repayment plan. This is the type of debt most average Nigerians found themselves.

If you are in a bad debt, you are in it because your money issues are not under the system that controls money and your income is either below or equal to your expenses. So the first thing to do to get out of this debt is to make sure your income surpasses your expenses.

These you can do by cutting off your unnecessary spending or creating multiple streams of income. Once you have succeeded in doing any of these, the next thing to do is to examine the interest rate surrounding your bad debt.

There are two classes of debt, which are formal and informal debt. The formal debt is the one you get from financial houses with a structured repayment plan and continuous default in the repayment plan can lead to loss of whatever the collateral is.

Informal debt is money borrowed from any other source without a structured repayment plan. The money could either be borrowed from a friend, relation, stranger or corporative group. Whether formal or informal, debt comes with no interest, fixed interest and dynamic interest. The worse kind of debt is the dynamic interest debt.

Debt with dynamic interest rate is a debt in which whether you pay the capital or not, you are paying a monthly interest rate. The lenders or creditors are not worrying about the repayment of the borrowed capital as long as you are paying the interest rate.

If you find yourself in this kind of debt, you will realize that you can spend several months paying the interest rate without paying a dime from the borrowed capital. Sometime ago, I got into such debt and practically paid more than the borrowed capital as the dynamic interest without paying a dime from the capital.

This kind of debt is very bad and must be taking care of as quickly as possible. If you are in a debt with dynamic interest rate, here is what to do; you need to renegotiate with the creditor. Make sure the creditor gives you a flexible plan that will help you pay back the debt.

Your negotiation should be that you cannot pay all the capital at once. But you want a flexible repayment plan that will permit you to pay the monthly interest rate and small part of the capital. That is every time you pay the interest rate, you will also pay a very small amount from the capital. That way, it will reduce the next interest rate as well as the capital in the following month.

If you cannot reach such repayment plan with the lender, then you need a second option—to borrow money from elsewhere with a fixed one-time interest or no interest rate to offset the dynamic interest rate loan. But make sure wherever you are lending the money from; the creditor agrees to a flexible repayment plan that is comfortable for you and your income.

Always learn to negotiate with your creditor regardless of the type of debt you are into. Your creditors want to listen to you and are more interested in getting back their money instead of keeping your collateral. And once you can secure a flexible and comfortable repayment plan, discipline yourself to keep to the plan so you can get out of debt as quickly as possible.

Alfred Ade-Ijimakinwa