Oran Hall | Forgive us our debts

The questions that readers have put to me over the last sixteen years tell me much about why people incur personal debt, why they fail to pay, what they do to address it, how they expect lenders to respond, and the consequences of not honouring their debt obligations. What is clear is that lenders are serious about collecting.

It is fair to say that the stories of the readers who found it necessary to seek advice is the story of many Jamaicans.

It is clear to me that many borrowers are young people, typically in their twenties and thirties – the very first phase of the life cycle when it can be difficult. It is a time when people are trying to get settled and to lay the foundation for the future as they acquire some basic personal assets to begin life.

One thing that stands out is the preponderance of credit card debt, which, though too easy to come by, is expensive and builds up rapidly, partly because of the high interest rate and by how the interest due is calculated. Far too many people incur credit card debt without understanding how it works and what the consequences are for not paying, preferring to use it to get short-term gratification.

And many people believe that they can incur credit card debt and other forms of debt and not be responsible for paying consistently or at all.

There are many reasons why people incur debt. Some are good. Others are bad, very bad. Some incur debt to fund their education, which is very good. Others incur debt to provide shelter for themselves, hoping one day to liquidate the debt and finally own the property fully. Of course, this is good.

On the other hand, people borrow to acquire assets they are not able to afford – like a motor car, which requires significant spending to maintain beyond the cost of servicing the debt. There are also people who borrow to fund their weddings, then start off life heavily indebted. I wonder if that is why some marriages start off so rockily?

People also borrow for others – friends, family and lovers – many of whom abscond or just refuse to pay, leaving the person the lending institution recognises as the borrower to pay or face the music when the lender takes action to collect. Some of these borrowers refuse to pay, not seeing themselves as the ultimate debtor. The lesson is this: Be careful about borrowing for another person, especially one who does not qualify to borrow from a financial institution.

One reason some people have problems is that they borrow far more than they can afford. Some borrow from multiple lenders, sometimes to use the proceeds of one loan to pay another, or to incur another debt to make an acquisition to satisfy a desire to live life now.

Although at the time some people borrow they are able to pay, the situation changes due to unemployment. Some experience redundancy but use the lump sum to liquidate debt, thus having little to meet current living expenses or to establish another source of income. Servicing a loan requires a steady, reliable flow of income.

Some borrowers try to walk away from a debt by totally ignoring it, just like readers who had debts outstanding for four years, five years, and fourteen years. Of course, these debts ballooned due to accumulated interest.

Not paying a debt carries grave consequences: a low credit score, which makes it very difficult to borrow again, and the loss of assets through repossession. On the other hand, paying a debt well can have the negative consequence of reducing the sum available to pay regular living expenses.

Some borrowers expect lenders to forgive their debts. They contact the lender to say they are not able to pay and expect to get suggestions about how to find a way to pay, or they expect to get a threat or two before the lender takes action to collect. Some borrowers even expect an amnesty from the lender.

Lenders do not give amnesties. They need to collect their depositors’ money from the borrowers. Thus, they collect the money by engaging debt collectors or by taking legal action.

Although some borrowers genuinely encounter problems which make it difficult to repay their debts, others have a particular attitude to debt. They do not believe in repaying their debts. If you have ever given a loan to a family member, friend or colleague, you will understand. Do you believe the people who do not repay you can suddenly change and pay an institution?

Some individuals who do not honour their debts can do so, but have no interest in so doing. While they can get away when they borrow from other people, they are not so lucky when they borrow from lending institutions.

If people change their attitude to borrowing, it is likely that they could become more patient and borrow later or borrow less. Others could become ethical borrowers. On the other hand, the ability to pay can change and impair the debt repayment programme of even honourable borrowers, but commercial lenders do not put debt forgiveness on their scale of priorities.

n Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email: finviser.jm@gmail.com