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Avoiding Bad Debts

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It is said that where there is smoke there is bound to be fire and an alluring food aroma is an invitation for the stomach to feast, however it is good practice to keep within your limits. You may wonder why am saying this, but in a world full of creativity and run by the ever increasing need for mega profits, many entrepreneurs and individuals are lured by lucrative offers from financial institutions on their loan (credit) products.

As Liberia is getting back into a vibrant economy, many local and foreign investors are identifying products and services that consumers are increasingly demanding including new interests that were not there before. We have noticed how more people are demanding for better education for their children in order to complete globally. The high rise in electricity demand as businesses and homesteads expand. Let us not forget the wanting transportation industry that has seen rise of motorbikes and in the midst of these! Banks are providing more services than ever before.

I will dwell more on financial institutions as they form the tip of our subject today. Unlike five or ten years ago, where loan application was such a long bureaucratic system left for the few well to do, to expound on their well furnished status. Today it is a process that invites every Tom, Dick and Harry who has a financial need to quest. As progressive as it may seem, it has the potential to transform part of our society into greed just as the lure of food in a buffet does.

Picking from the example of the burst bubble in the housing market experienced recently in USA, many of those who lost their homes had been lured by the attractive financial offers. Although these experiences are not yet rampant in Liberia, they are forth coming if current borrowing trends are anything to go by. So before applying for that loan, here are some tips that could help you, avoid bad debts:

Lay down a Financial Plan prior to seeking the loan. This will be the road map to guide you on the journey to repayment, as the borrowed sum does not belong to you. An analytical financial plan should spell out: what you want to achieve, for example to increase production capacity. How much money you want to borrow and the duration you will be taking to pay back the money. Also boldly indicate the interest you will pay the financial institution so that you can evaluate if the project is worth while.

It is also advisable to consult widely especially from financial specialist before engaging with the financial institution. This is because an expert opinion can highlight to you something that maybe missing or direct you into the best loan facilities available to you.

Borrow wisely; don’t just be hooked to the habit of extending your arm whenever an opportunity presents itself. For example Liberia has very many shylocks who will charge you a whooping 25% for any amount borrowed and to be repaid within 1 month. So if you walked by the stalls and saw a nice dress worth six hundred dollars, and you really wanted to purchase it but don’t have the money, you seek the services of a shylock and were able to purchase your valuable dress; simple math shows that you will have bought that dress at seven hundred and fifty because of the repayment. Would it have been better to wait?

Before applying for a loan, assess the risks involved as unforeseen situations may hinder you from repaying on time. Make what is called a plan B, or being ready with an umbrella for a rainy day. The probability of flopping may seem low while making the loan, but it’s good to be ready for any circumstance. A young entrepreneur recently took up a loan to import cars for sale, in his naivety he underpaid for the insurance cover and as fate would have it, the ship that was fleeting the cars sank. It was a painful lesson as he is still struggling to repay the loan before the bank forecloses on his collateral.

Remember when in a fix negotiate! This is an old rule of thump that will come in handy. Misfortune can ride on anyone, as that lucrative business offer may dwindle in darkness when you have just hit the market. When this happens don’t panic but rather put on your convincing shoes and head to your financial institution ready to negotiate for extension or lowering of the interest rates. Make your case and let it be genuine with support documents. As banks would rather have you repay some amount than lose all of it, they will be willing to listen to you, rather than lose a valuable customer.

I will finally point, another important lesson is not to take credit to pay for another credit, what this merely does is increase your interest rate and burdening you more.

Avoiding bad debts is elementary math, just plug in the right formula and stick to the basics of borrowing, don’t forget why you took the loan in the first place and more importantly that you have to pay it back.

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