This kicks off our series on debt. The heart of this series is to help you to not get into debt, get out of debt if you are in it or for you to ultimately stay out of debt after paying out all your debts. Debt makes you a slave to the lender and takes out your confidnce to live life to the full.
For this series, RFP’s very own Kendrick Chua will be shedding his insights to guide you on the ins and outs of debt as you move towards financial freedom!
The problem with debt is that when it spirals out of control due to mismanagement. And unfortunately, this happens more often than not. If you think that having any form of debt is just “wala lang” as what we Filipinos normally perceive this, think again. It’s actually worse than we thought.
1. Negative cash flow
As debt repayment becomes part of your monthly expense, this takes away a chunk out of your monthly budget. Face it, this entry may not be previously listed in your budgeting, but as you incur more and more of it, the repayment suddenly becomes large enough to affect your cash flow. If you were living just enough before, incurring debt now result to a negative cash flow. And what do you do to bridge the gap? Simple! Borrow money! And the cycle continues. See where this is going?
What is worse than that is the astronomical interest rate imposed by the creditor. Interest rates on personal loan is around 18 percent. Credit cards’ are even worse, around 40 percent a year! This even buries you deeper if not solved fast enough.
2. Poor credit standing
With the implementation of the Credit System Information Act in 2009, a borrower’s positive and negative credit information are recorded. These information are recorded and accessed by entities that wish to lend you money. So if you have any default on loans, foreclosures, cancelled credit cards and even bounced checks, chances are, you are considered delinquent.
Having a poor credit standing affects your loans. Financial institutions may ask more requirements from you than they ordinarily would. That is if they do decided to even lend you. Interest rates are likely to be higher if you have a history of default or late payments. Bottom line, everything is against you if you have a poor debt management.
3. Emotional stress
More than just the money, the thing that drives the problem deeper is the overwhelming and sickening feeling of being harassed to pay them back. Although the law prohibits harassment, threats and humiliation in collecting loans, collection agents employ these underhand tactics just to get us to pay back. It’s illegal; but it gets the job done.
Year ago, a colleague shared with me how her mom just forked over P100,000 worth of illegal credit card transaction because the collection agency was already harassing her non-stop. She is already in her 60s and the last thing she wants is more stress. She felt her contest against the transaction was going nowhere, she decided to end the agony by just paying the full amount.
4. Ruined relationship
Perhaps worst of them all is the impact debt has in our relationship with others. How many relationships have been ruined because of debt? I personally have witnessed friends falling out, and partners ending their business because of it. More than just the money involved, it is the trust that was abused. If you sincerely decided to help out a friend, you did it with the intention of recovering your loan. But unfortunately, our culture tolerates non-payment of loan.
Case in point, a friend of mine generously lent out money to her friends in need. This was done with the promise of paying her back come payday. Payday came and instead of seeing her money, she received all sorts of excuses. She let it past for the mean time. Two weeks later, she received the same excuses. When she got mad at them, they countered her with their own anger. When she asked them about it, they would retort, “What can I do? I still don’t have anything to pay you back!” The thing is, these same people would go out on spending spree. Much as she hated it, she severed all ties with them.
The utmost consequence all these negativity is in ourselves. Our morale is down. Our confidence is doubted. And worst of it all, our health also suffers because of all the anxieties and worries. Those are more than enough to make us fear debt. And we should. Otherwise, we just might end up suffering all four of these.
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Kendrick Chua is a Registered Financial Planner and Chartered Wealth Manager . He is passionate about helping people get out of debt and learn how to plan out their finances. He is a stalwart of Chinoy TV and is known as the Binondo Economist.
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