Oran Hall | Dealing with a bad loan

QUESTION: I have a loan with a commercial bank that was recently declared bad because of late payments. I am seeking advice on the best way forward for me to deal with this. Looking forward to your response.

Campbell

FINANCIAL ADVISER: The short answer is that you should contact the bank if you have not done so already and make arrangements to address this delinquent loan. It is in your best interest to do so considering how this matter will affect your credit rating and the implications.

Much of what follows is general and is not addressed specifically to you. There is nothing inherently wrong with borrowing. It is one way of making many things possible by making money available to make purchases that are necessary but for which there is not sufficient money to do so.

What is important is the ability to make the required payments of principal and interest on time.

Failure to do so inevitably causes the debt to increase as the interest not paid is added to the principal in addition to the penalties, which may also apply. Especially when arrears begin to build up shortly after the loan is disbursed, this may cause the outstanding balance to exceed the original sum borrowed.

It is best to borrow to fund items that have long-term utility or items that can generate income. It is also prudent to match the term of the loan with the useful life of the asset it is being used to fund if that is possible.

Although it is good to be able to pay off a debt in the shortest time possible, the monthly payments are higher than those associated with longer-term debt, but although the payments on longer term debt are less, the interest paid over the life of the loan is more.

Considering that much can go wrong, care should be taken to ensure that there is a

cushion if the worst happens. Income can be disturbed by unemployment or sickness, for example. It is thus useful to have an emergency fund in the event of such an eventuality.

Lending institutions are seeking business aggressively. They pitch loans to the public and make it so easy to access funds, but it is worth paying them no mind when they pitch a loan to you that you did not have any thought of seeking prior to what appears to be their attractive loan offer. Ultimately, they want to be able to collect from you and do so on time.

Failure to honour the terms of a loan agreement may lead to the loss of the assets used to secure the loan if it is a secured loan, and, with a credit rating system now being in effect, a bad record against your name as a borrower is bad news.

Delinquency is not confined to failure to pay just principal on time. It also applies to failure to pay interest. It is, therefore, not prudent to overextend yourself, but if, for any reason, you find that a problem is developing, it is

important to take steps to address the issue before it becomes unmanageable. One important step is to make contact with the lender.

Debt consolidation is one course to take in cases in which there are multiple loans and there is a problem although the process carries some costs. This creates breathing space as it generally leads to lower monthly payments and, quite likely, over a longer term, but those monthly payments must be made.

The fact that you may have encountered a difficulty in servicing your current debt does not mean that this is the end of the road for you. Quite likely, you will not be able to borrow for the time being, which is not a bad idea as borrowing more would only add to your burden.

When you have discussions with the banker, do your best to arrive at terms that are manageable. Most important of all, honour the new commitments. That is the first step in restoring your name.

As you go forward, ensure that you have a spending plan. I do not know if you are now earning income, but servicing your debt must be a priority so you may need to make sacrifices.

- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. finviser.jm@gmail.com