Borrowing Beyond Your Means

April 16, 2018

Trying to forge ahead in life and ensuring financial stability can prove to be a daunting task for families, particularly young families. The trouble of having to ensure basic needs are met often involves a lot of planning and sacrifices. Some families barely get by but continue to work hard for a better life. Others have a steady flow of income that keeps their families comfortable. Whatever the circumstances of a family may be, there is always a yearning to establish a better foundation for themselves and for their future generation.

Today, financiers have made access to loans easier ensuring customers who need money for an unforeseen circumstance or a new development to get their support. Some see taking a loan as the most effective way of meeting their needs and making regular payments that will ensure they repay the principal amount plus interest. Regular payments are an indication to the bank that you can manage your money.

When taking loans it is always important to plan payments. Those who are not careful with payments face the risk of falling further behind financially. This, then creates a cycle of debt that can impact a person for years to come.

Many individuals take a loan in haste to solve their financial matters. An inability to plan and meet payments for the loan then amounts to irresponsible borrowing. Being an irresponsible borrower impacts negatively on a person. Inconsistencies in payments convey to the bank that a person has a bad credit record, making it difficult to take further loans.

The Council recently received a request for assistance from a couple who had difficulty meeting their loan repayments. They had taken out a home loan with a bank and thought they would extend the house by building two extra flats to yield additional income.  To fund this, they sought an additional loan from the bank. Their request was approved and their total loan tallied at $181,700. They were expected to make a payment of $550 per fortnight.

The bank had granted the additional loan on the condition that the couple do not engage into any external debts until their current loan had been substantially reduced. The couple however, did not honour this agreement and took two extra loans from another financial institution worth $15, 000 with a payment period of 6 years. Unfortunately, this loan repayment was deducted directly by the employer on behalf of this financial institution which left only a net income of $491.26 towards home loan creating a shortfall of $58.74 every fortnight. 

The additional loan was seen by the bank as a breach of their mortgage conditions and posed a threat to their finances. The couple did not have enough funds to survive as most of their money was directed towards paying the additional loan. With this breach, the risk of the couple losing their home was high.

Ultimately, the bank decided to put the property on mortgagee sale. After seeing their property advertised for mortgagee sale, the couple sought Council’s assistance.

Through the Council’s intervention, the bank agreed to forestall any further mortgage sale action for the couple’s property. The couple requested for an extension of time to at least pay the amount in arrears. It is imperative that consumers always disclose true financial positions to credit institutions or financiers. This is to avoid financial disaster.

In this case if the couple cannot pay the arrears then the bank will proceed with the mortgagee sale. Generally, when properties go on mortgagee sale it does not attract market rate. If the property is sold at a lower price it would mean that the couple will lose their FNPF contribution which they used towards buying the property and any difference between loan amount and sale price will be recovered by the bank. This is a huge financial loss for the couple for not adhering to the terms and conditions and for not understanding their financial position.

It is always important to plan out your income and learn to calculate your debt to service ratio before taking out more loans. It is also crucial to live within your means. The Council continues to recommend that consumers save for unforeseen circumstances.

Communicate with your creditor if something prevents you from paying on time. Most financiers are willing to work with consumers on coming up with an arrangement that suits your budget needs. It is best to keep creditors posted and discuss with them how your troubles can be ameliorated in the near future. Being an irresponsible borrower is never the way to go. It impacts your credit, financial status and reputation as a borrower.