The FINANCIAL — Everyone dreams, and some of us dream more than others.
We dream about things like finding the love of our life, going on a nice vacation, starting a business, or getting an education. Lending institutions, most importantly banks and microfinance institutions, are in the business of financing those dreams, that require money. While these dreams always start with an individual, they can also be a company’s dreams, or even a country’s dreams.
We learn by succeeding sometimes, and failing very often. In most cases, it is a much better way of learning than someone telling you what to do. When you fail, you stand up, and you try again. However, when you need someone else’s money to finance your dream, there can be significant downside risks to failure.
The biggest risk for an individual related to loans, is getting caught in a cycle of debt. Taking out a loan to finance your dream can be very empowering, but there is always a danger of over-indebtedness.
According CreditInfo Georgia, 31% of borrowers have loans from three or more different institutions at the same time. This number only covers formal lending institutions, and not informal moneylenders, and other organizations that do not report to CreditInfo Georgia.
Often people take out new loans to cover payments for other loans, sometimes even turning to informal moneylenders or friends or family.
This is a precarious situation, because their debt keeps increasing, and all of their income goes to debt repayment. Eventually this can lead to a credit bubble, which pops when many borrowers can no longer bear their debt burden, and default. This is what happened in the Indian state of Andhra Pradesh, where default rates skyrocketed, and aggressive collection policies of MFIs supposedly pushed several people to commit suicide. It is never a walk in the park when credit bubbles burst, and especially in parts of the world that lack a well-developed regulatory framework, and enforcement procedures are rudimentary, this can lead to real human suffering.
The second big risk is not understanding the terms of the loan. In fact, in our organization, we see many clients who do not even read the contracts they sign, which might cause unpleasant surprises later. In Georgia, there are small and large organizations that put terms in their credit contracts that would scare off any well-thinking person. Outrageous refinancing fees or fines, or massive commissions are not unheard of, and often prepayment of principal is not allowed or only with a severe prepayment penalty.
There is a lack of financial knowledge in Georgia, and most borrowers do not know what the terms in their loan contract mean. In order to help resolve this situation, in our financial literacy workshops, we provide participants with a sheet with questions to ask lending institutions when they take out loans, so that they do not encounter any bad surprises after they have already signed the contract. For example, many clients do not realize that being even a few days late on a payment, can lead to very high fines, and that these fines are far from the same at different institutions.
Lending institutions finance dreams. Everyone loves dreamers, but all of them need to get real at some point, to be able to actually make their dreams come true. Compromises have to be made where dreams meet the real world, but foremost, the dreamer has to learn to understand reality, in order to not be kicked in the butt by it.
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