Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Most debts are arranged at an interest rate often determined by the creditor, but are often negotiable. Interest rate on loans can be a floating or fixed rate.
It’s amazing that it’s so easy to get into debt, but painfully difficult to get back out. It can take just a few months to create tens of thousands of cedis in debt, but sometimes decades to pay it off. Everyone who pays off their debt does it a different way, and often combine strategies to knock out bad debt.
Getting into debt brings a lot of stress on the debtor and can affect other aspects of the debtor’s life. This article seeks to shed some light on how people subtly get into debt, and how to get out of debt and enjoy a meaningful life through investments.
Things That Get People into Debt
For personal commitments
People borrow to meet some personal commitments toward themselves, dependents and family. People borrow for school fees, to pay rent and acquisition of property and so on. All these commitments can be funded with funds gathered from investments; but when they have no investments to fall on, they resort to debts either by taking a loan from a bank, from their welfare scheme in the office, or from family and friends. Some of these personal commitments are avoidable, especially if it is not an emergency.
Borrowing for consumption
Many times, people borrow for consumption because the loan is available to them. There are so many financial institutions that advertise their loan through text messages and other mediums. Some people cannot resist the temptation of taking a loan. Loans taken for consumption are not self-financing, and this makes it difficult for the borrower to pay.
Workers are often faced with companies chasing them to buy electrical gadgets and other consumables on hire-purchase basis. Some of these hire-purchase items are bought on impulse basis. They come in as wants and not necessarily needs.
Borrowing to keep status
Some people get into debt because they have to project a certain status and their income levels cannot support that. A typical example is someone borrowing in order to pay for rent in an expensive neighbourhood, or buying an expensive car whose maintenance and fuelling your income level cannot support. Buying expensive clothes and eating constantly from expensive sources because you want to impress someone is also common.
If you always consume without investing, when you need a lump-sum for an emergency you have to go and borrow at a high interest rate. In investment, an investor postpones consumption in order to invest for a good return; but in debt, a debtor actually borrows today and pays in the future – and this can affect the one’s consumption ability in the future.
Reasons why you should control your appetite for debt
- In Deuteronomy 15:1-4 of the Old Testament, debts care often cancelled in the seventh year.
In biblical times debts are often cancelled in the seventh year, but this is not the case in our contemporary world. Even in the biblical times when debts were cancelled in the seventh year, borrowers were considered slaves to lenders.
- Your assets can be confiscated to pay off the loan
When you borrow money and you are unable to pay the loan back to the lender, the assets that you used as a collateral can be confiscated to defray the loan. When that happens, you will be left with nothing. Sometimes the assets that get taken over by the lender are assets that the borrower may be emotionally attached to.
- The lender will go after your guarantor
Lenders sometimes go after the assets of loan guarantors when those they guaranteed for default in paying the loan. This occurrence may put pressure on someone who did not benefit from the loan. They can affect your relationship with the person.
- Your credit rating will be bad
You may not receive any loan with a bad loan repayment history. It tarnishes your reputation and makes it difficult for you to access loans when you genuinely need one.
Ways to Get Out of Personal Debt
Stop creating more debt
This alone won’t get you out of debt, but at least your debt won’t get worse. When you continue adding debt while you’re paying it off, you won’t make much progress, if you make any progress at all. Reduce your temptation to create more debt. Don’t be a chronic borrower.
Increase monthly payment
If you are only paying the minimum on your debts, it will take the longest time to get out of debt – e.g. (flexi-payment for a mortgage). You can increase your monthly repayment to enable you finish the debt payment early.
Withdraw from retirement fund
You can withdraw from, for instance, your Tier-3 to pay off your loan if the monthly repayment is taking a toll on your disposable income and affecting your standard of living adversely.
Ask your creditor for a lower interest rate
Higher interest rates keep you in debt longer because so much of your payment goes toward the monthly interest charge and not toward your actual balance.
Dispose of asset
Usually, loans are contracted to purchase some asset for business or personal use. When the loan becomes difficult to pay, the asset can be sold to pay off the loan so it does not bloat beyond repayment.
Take a cheaper loan elsewhere and pay off
A debtor can actually go for a cheaper loan elsewhere to repay the existing loan and ask for a moratorium.
Propose a favourable payment plan
The debtor can also consider coming up with a favourable repayment plan that will ease their financial burden.
Take a look at the business model
For business people who borrow to fund their business, when the cause of the default is due to the fact that the business model is not generating enough funds for working capital and monthly repayment amount, a remodelling of the business can help a great deal
Go back to the proposed use of the loan
In Ghana, some private business owners find it difficult to separate their personal expenses from business expenses. So they may go in for loans in the name of their business and divert the funds into other uses. Loans often go bad if the loan amount is not used on the purpose for which it was contracted. A revisit to the original plan helps a great deal.
While you work on getting out of debt, you need to start a personal finance plan that will guide your expenditure going forward. That can be achieved through budgeting. Budgeting is the process of creating a plan to spend your money. A budget is simply a spending plan.
The personal cash flow statement consists of two parts: namely your income (net after tax) and your expenses. Anyone that is serious about getting out of debt should be able to segregate their needs and wants when they budget. The person needs to go a step further in striking out some wants and then find cheaper alternatives to the needs that cannot be avoided.
Getting out of debt demands a total overhaul of spending habits. Bad spending habits need to be stopped, and then develop a positive habit for investments. You cannot stay out of debt if you decide not to invest. You can change your status from a debtor to an investor if you sign on to invest in any of the Fidelity Securities Limited Collective investment schemes, with as low as GH¢100; and then through a standing order of direct debit you can invest consistently to build value. By all mean, invest!
The writer is author of the under-listed books:
- Start Right: A Guide to Financial Investments in Ghana
- Overcoming Infertility: What to do When Childbirth Delays
- Contemporary Parenting
- Stepping up Your Life
Email Address: [email protected]
Disclaimer: Views expressed in this article are the personal views of the author and do not reflect views of the organisation she works for.