QUESTION: I have two loans paying back: one for my vehicle that I use for transport and one I took out for equipment. On the personal side, I also have a mortgage paying on my apartment. I know this might sound a way, like I never did the proper research, but to be honest, I never know that loans can increase just like that.
Last month is the third time they increase the interest on my loans, and if I had known before that this would happen, I wouldn’t have taken them out because I can’t increase prices to customers. I can hardly make the payments now. Do you think it is fair for the bank to keep increase like this? Is it going to continue to increase? What do you recommend in a case like mine?
– Stressed out business owner
BUSINESSWISE: What you are currently experiencing is the downside of interest rate risk, especially for small borrowers. It is a major challenge affecting consumers and businesses worldwide as many countries, like Jamaica struggle to battle record high and unusually volatile inflation since the COVID-19 pandemic, exacerbated by shortages and disruptions caused by the Russia-Ukraine war and climate change.
Most loans are priced at variable rates in Jamaica.
Interest rate risk is particularly precarious for Jamaican borrowers because most financial institutions don’t offer fixed interest rate loans. As an example, the CEO of one of Jamaica’s largest mortgage companies recently disclosed that 100 per cent of their loans are variable. By comparison, in the United States, our largest trading partner, over 90 per cent of mortgages are fixed rate, and most homeowners are repaying loans at lower rates than today’s record highs.
To make matters worse, the Government of Jamaica has offered limited protections for borrowers from high interest rates.
Interest rates will likely remain elevated for now.
Given the context I’ have just outlined, I am sympathetic to your perspective that borrowers are getting a raw deal. However, my view on whether the increases are fair won’t change your situation. It is possible that interest rates can increase further, however, the Bank of Jamaica, BOJ, which sets the policy rate that underpins the rates charged by banks to borrowers and paid to their depositors, has held the policy rate at 7.0 over the past several months.
If the BOJ’s policy rate begins to trend downwards, then you are likely to see the banks and other deposit-taking financial institutions also lower interest rates.
However, the inflation rate is still outside of their target range, so a drastic reduction in the near future is unlikely as the aim is to stabilise and further reduce inflation. The BOJ’s next policy-rate decision will be on September 29, so keep visiting their website for updates. The website also provides a schedule of upcoming policy rates decisions and useful news releases and data, which can support your planning and analysis.
From a risk-management perspective, the best practice treatments or solutions for interest-rate risk are implemented before taking out a loan. This would include limiting borrowing, shopping around for the best interest rates, negotiating fixed or lower rates with the bank, setting aside monies to pay down the debt if needed, and so on.
It is too late for you to limit borrowing, but you can apply the other mitigating actions such as shopping around for lower rates, negotiating with your bank, and exploring the feasibility of debt consolidation if it can lower your liability and monthly costs. You can also ask for a moratorium on the rate increase, so it takes effect later, and gives you a little time and space to manoeuvre.
In the worst-case scenario, to lower your monthly repayment you can extend the life of the loan so you don’t suffer a cash-flow crisis that cripples or shuts down your business.
Cash is king, especially in this environment. In fact, according to the latest statistics, it would appear that banks are tightening lending to most sectors, except for micro loans. However, this is where they charge the highest interest rates, so be mindful of their own strategies to manage your borrowing rates in the current environment.
I wish you the best and hope you encounter compassionate bankers who will be flexible and prudent in maintaining your business as you try to negotiate a better hand that will allow your business to survive.
Yaneek Page is the programme lead for Market Entry USA, and a certified trainer in firstname.lastname@example.org