If you are thinking about borrowing money, it is important to carefully assess your ability to repay. Failing to do so can lead to numerous challenges and difficulties with creditors, JOSEPHINE OGUNDEJI writes
The sad story of a 20-year-old student from the University of Ilorin who tragically took her own life due to her inability to repay a debt of N500,000 owed to some loan apps, highlights the crucial importance of conducting thorough research before borrowing money. This is because loan defaults could be traumatic.
According to the report, the late Unilorin student wanted to use the loans she collected for an affiliate marketing business, which eventually failed.
Like this student, many people have been trapped in a cycle of debt because they did not do diligence before going for loans. Many individuals fall into debt due to unrealistic promises of high business returns and excessive borrowing.
The sad story of the Unilorin student underscores the importance of careful financial planning and the need to focus on investments with a high probability of success rather than gambling on uncertain ventures.
Many individuals turn to loans as a means to achieve their goals, using them to bridge financial gaps that might otherwise prevent them from realising their aspirations. Whether it is buying a home, or car, financing a wedding, starting a business, funding travel, or maintaining a specific lifestyle to meet societal expectations, debt often becomes a tool in the pursuit of fulfilment. Unfortunately, some individuals 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 allure of debt can be deceptive and appear as an opportunity for advancement, it is essential to approach financial matters with prudence 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 aim to lead us towards our desired future, free from debt and its risks.
According to Money Africa, loans affect people in the following ways.
Continuous cycle of debt
This occurs when you need to take out new loans to repay existing ones. You don’t want loan apps coming after you, so you end up borrowing high-interest loans to settle your current debts. Once you embark on this path, it can become extremely challenging to break free because you will find yourself paying even more in 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 strain budgets, potentially leading to stress and anxiety.
Loans enable people to acquire assets like homes or cars. This can improve one’s quality of life and provide a sense of accomplishment. However, it is essential to recognise that relying on loans alone can provide only temporary relief and may eventually lead to a debt cycle. The most prudent approach to fulfilling such goals is through diligent savings and financial planning. Not only does this enable you to acquire the assets you desire, but also helps you do so without the weight of excessive debt.
Emotional and psychological impact
The weight of financial obligations can lead to stress and anxiety, profoundly impacting one’s mental health. The constant concern about repayment and financial stability can gradually erode overall well-being. This turmoil can have repercussions that extend beyond personal life. It can influence your level of productivity and affect your performance at work or in your business.
In some cases, it might even reach a point where employers are compelled to make difficult decisions like relieving you from your job due to these issues. If you are a business owner, the mental strain can hinder your ability to devise effective strategies to propel your business forward, potentially resulting in stagnation or decline.
Lifestyle and relationships
Loans can delay life milestones like marriage, having children, or retirement. The need to repay debt often takes precedence over personal goals and causes strain in relationships. Disagreements about how to manage debt can lead to conflict within families and between partners.
Career and opportunity
Some individuals may opt for higher-paying jobs they dislike because they need to repay loans quickly, rather than pursuing a career they are passionate about. The weight of debt becomes such that it compels them to prioritise financial obligations over their own passions. This can lead to years spent in a career that does not bring joy or fulfilment, all because debt must be repaid, and bills must be met.
The fear of financial instability caused by loans casts a shadow over one’s professional aspirations and influences the paths they choose. This fear might dissuade individuals, including potential business owners, from pursuing their entrepreneurial dreams and embarking on new endeavours. This deprives them of the chance to follow their passions and ambitions.
Money Africa noted that loans are a double-edged sword, offering opportunities while imposing responsibilities.
To minimise the negative impact of loans, the financial company advised that it was crucial to approach borrowing with careful consideration.
“Understanding the terms and implications of loans, creating a budget, and seeking financial advice can help individuals manage their financial health and mitigate the potential adverse effects of debt,” it stated.
In an exclusive interview with The PUNCH, a financial expert at Deloitte Canada, Abdulmumeen Ridwan, said understanding that there were different types of loans was required.
He said, “If you would be borrowing a loan, anything that you are borrowing a loan for should be something that in the long run is profitable. If you need a loan for a short term and for personal upkeep, it is better to borrow from close friends and families.”
However, a finance expert, Leke Olushuyi, said financial institutions in the country were not totally accessible in terms of loans to low-income earners.
He said, “For example, if you borrow from a proper financial institution, a bank, you would be given a subsidised percentage per month, unlike a loan application would give you an outrageous percentage monthly. In addition, aside from the interest being owed, loan applications charge a penalty fee in the case of default, which accrues with the interest being owed, and this penalty fee accrues daily or weekly. “
According to Olushuyi, the reputational damage could be really condescending and ruining the person’s name in the long run.
He added, “These loan applications have a way of getting their loan back from people, and it can be really condescending, especially for professionals who are building their character. I do not encourage people to take loans from loan applications.
“The way forward is for financial institutions (banks) to come up with micro-loan facilities like N20,000, N50,000, and N100,000, amongst others, that small business owners can access, and individuals as well. So, it is essential for stronger financial institutions to cater for low-income earners.”
High default rate
In the past few years, there has been a significant surge in the number of loan platforms operating in Nigeria. These apps are specifically 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 for personal or payday loan approvals, making them increasingly popular.
Despite the popularity of lending apps, a substantial number of them remain unprofitable. This is largely because users struggle to repay loans due to low purchasing power, driven by high inflation and stagnant salaries.
In 2021, Kuda Bank, for instance, incurred losses of about N6bn due to high non-performing loans.
“Kuda, a Nigerian neo bank, lost of N6,092,554,866 ($14,214,681) in 2021. A lot of this was driven by bad loans as their default rate was 69 per cent compared to 4.8 per cent for traditional banks.
“By the end of the 2021 financial year, the company recorded a loss of N6,092,554,866 ($14,214,681), a 602 per cent rise from the N868,062,000 ($2,025,295) loss it made in 2020,” it stated in its financial report.
The financial report of the microfinance bank indicated that the company’s revenue increased by 4,315 per cent from N72.65m in 2020 to N3.21bn in 2021. However, after expenses had been deducted, the company closed the year at a net loss, with high credit loss/impairment charge and operating expenses contributing the most to the loss.
The high loan default rate stems from the fact that some borrowers believe they can avoid the consequences of defaulting on loans, such as harassment from those platforms.
The lending process in Nigeria involves multiple steps, beginning with the determination of how much to lend to a user based on their credit profile. Financial institutions evaluate the customer’s credit history and their history of repaying loans.
According to an insider with six years of experience in the fintech industry, it is not sufficient for borrowers to repay their loans; it is equally important that they repay them on time.
Typically, the initial consequence of failing to repay a loan is receiving numerous messages and calls from the institution’s loan recovery team. Some individuals intentionally disregard these messages and calls. Eventually, these communications cease as the loans are written off. Different financial institutions have varying timelines for declaring loans as uncollectible.
There is a category of loans that become irrecoverable, and these organisations cannot continue expending resources in attempts to contact the customers. In most cases, these loans are covered by insurance, allowing the institutions to effectively clear the customers’ debt and close their accounts without incurring significant losses.