Mon | Jan 17, 2022

Oran Hall | Prepackaged loans and troubled borrowers

Published:Friday | March 26, 2021 | 12:17 AM

I have often wondered why I hear so much from people who are deeply and desperately troubled because they are drowning in debt, seemingly with no way out. Credit card debt is a big problem but this discussion is not about that.

I decided to take a look at the telephone directory under the heading ‘Loans’ and observed that there are several lenders, including smaller traditional, well-known financial institutions and some that are less well-known offering a wide range of loans. This has caused me to wonder if there is a correlation between the relative ease of borrowing and the challenges of debt servicing.

The offerings are attractively packaged with alluring language, like a suitor calling. Loans are described as affordable, easy, accessible, hassle free with convenient and flexible pay-back plans. Some loans are unsecured, and the rates are described as attractive. Emphasis is put on quick processing and disbursement. Loans are tailor-made, too.

What are some of the primary purposes for which the institutions lend, and does the direction of their loans give an indication of the main purposes to which borrowers put the borrowed funds?

Here are some of the types of loans that seem to be most common: auto repairs and insurance, personal loans, motor vehicle loans. There are also business loans, mostly for small business, education loans, home improvement and mortgage loans. Less common are back-to-school loans, medical expense loans, debt consolidation loans, emergency loans. Interestingly, there are loans for utility bills, vacation, and for “any general purpose”.

There are same-day loans, payday advance loans, loans for special groups like teachers, police officers, government workers, nurses, transport operators, who, no doubt, must feel rather special for having a facility packaged for them.

Financial companies in the business of lending are doing what they were set up to do – lend. I have no doubt that many borrowers do service their debts well and that the lenders do well, or else they would have closed their doors. But some borrowers seem to be in distress.

What interests me is the reasons for which some people borrow. I am not able to say what proportion of these loans is for which purpose or what the repayment record is like, but I wonder if people’s priorities are in the right place.

Borrowing for business, education, house purchase and home improvement are solid. These represent investing activities with long-term benefits. Business and education offer prospects for improved well-being in the long run, if not in the relative short term as well.

Borrowing for debt consolidation suggests borrowing to address a situation that has become difficult, or that the borrower has evaluated the situation and sees one loan as less costly and easier to manage.

But it seems that many people are driving motor vehicles that are putting them under pressure. Perhaps they own a motor car out of necessity but their pockets are not able to manage the maintenance and the premiums. Perhaps it is reflective of a failure to plan well, including planning how to spend.

‘Personal loans’ is not described, so that could be a very wide category covering many different and varied activities. The most troubling part for me, though, is borrowing for utility bills, for vacation and for Christmas. For the last two, the borrower would have fully benefited from spending the borrowed funds long before the loan has been paid off.

The fact that so many lenders are offering payday loans suggests that many people are experiencing cash-flow problems. Is this a case of not spending carefully, or is it that earned income is so inadequate?

What is clear from what some distressed borrowers have said in their requests to Finviser for help is that they did not understand what they were doing when they incurred debt. And in many cases, people borrowed without understanding or even being aware of the consequences of not servicing their debt satisfactorily. Others encountered challenges due to the development of unforeseen adverse circumstances.

Although financial institutions are very keen to lend and make it easy to borrow, it is incumbent on prospective borrowers to weigh very carefully the cost of borrowing, whether it is absolutely necessary to borrow, and whether they can really afford to borrow.

There is a time and place for borrowing – and it is necessary to borrow sometimes – but better management of resources and expectations, plus the willingness to be patient and to make sacrifices, can help to dampen the perceived need to borrow.

Oran A. Hall, author of ‘Understanding Investments’ and principal author of ‘The Handbook of Personal Financial Planning’ offers personal financial planning advice and