Causes of Debt Problem Loans
There are many reasons why borrowers experience debt problem loans even after they have been accessed as having good credit.
Relationship between Lenders and Debt problem loans
Lending is risky business which often leads to debt problem loans; it is therefore inevitable that on occasion things will go wrong. Even seasoned lenders will experience cases of bad debts. Many times they will be tempted to indulge in wishful thinking and that the debt problem loans are only temporary. The debtor or borrower believes they will get things right in the end. Debt Problem loans like any other problems in life, do not just go away and help with debt solutions must be developed.
Irrespective of how soundly based the original lending decision was, at the first sign of trouble, a new appraisal of the position should be done.
Some of the reasons that create debt problem loans include:
- Natural disasters that have affected the cash flow, for example, earthquakes or floods. Sometimes a person may take up amortgage finance loan, which they expect to pay comfortably. If a natural disaster causes the home to collapse, the loan repayments have to continue. if the home is insured then the insurance pays for the loan. This will lead to debt problem loans
- Political instability and/or civil wars may escalate the debt problem loans. Civil wars and instability lead to displacement of populations. This in turn causes the borrower to default, especially if they have relocated to a far off land.
- Acts of terrorism. This like natural disasters and relocations aggravate the debt problem loans. Acts of terrorism cause distraction of property and loss of jobs. The destroyed property may be the reason why the loan was sourced originally.
- Death of Key man in management of the business is a major cause of debt problem loans. The key man or point man may be the only person who handles many of the financial functions of the company. When this point man dies, the new office holder may not be aware of some of the loans that need to continue being repaid. This interruption in installment repayments leads to debt problem loans since the installments may have grown to unmanageable levels.
- The borrower diverting the cash from the business to other uses may cause debt problem loans. The borrower may lack discipline in managing their finances and diverts money from loan repayment to other uses in the running of the business. This diversions lead to loans not being paid in time and the penalties and interests for such indiscipline are substantial. The diversion of cash may be due to corrupt practices by the borrower or borrowers agent.
Many lenders especially those banking in Kenya have to report on the debt problem loans and provide for these problematic amounts. This means that the profits that are reported by banks is reduced by the debt problem loans amounts.