“I work in the payroll department of a large organization, and I pay out millions of dollars each month to different loan companies. I know that some of these lending agencies charge exorbitant interest rates. My concern is that many of the employees are taking home little and nothing from their pay cheques. How can we get them to realize the dangers of too much debt?”

Consumer debt is on the increase in Jamaica today. The rapid demand for debt could suggest that we’re not able to meet our needs from our income, so we’re forced to borrow to make ends meet. Or it could be an indicator that many people are not willing to defer their desires until they actually earn enough to fulfill them.

With a high appetite for debt comes a resultant growth in alternative lending agencies. ‘Rapid Financing’, ‘Same-Day Loans’, ‘Quick Advance’, declare the advertisements from agencies that offer a fast track loan service. Reports from traditional credit facilities also point to the increase in credit card usage and loan portfolios.

It seems that Jamaica is now ‘debt-crazy’.

Last week we looked at some types of debt that could be considered beneficial because they provided an opportunity for future monetary gain. These include borrowing for education, housing, transportation and investment purposes.

On the other hand, bad debt is a liability that often lasts much longer than the item you bought with the loan. This form of debt is not backed by some asset, tangible or intangible, that can help to compensate for the loan.

Need help with getting out of debt? CLICK HERE!

Ironically it’s often easier to get a hold of ‘bad’ debt than it is to get a loan for a beneficial purpose. With just a valid identification, a reference letter and a signed contract, it is possible to receive unsecured financing in less than a week, or even the same day.

Opportunities to get quick, unsecured financing might abound, but they don’t come cheap. Most of these options have interest rates in excess of 30% and have high penalties if you miss the payment date, or even if you’re late by a few hours from your agreed repayment time.

Let’s look at some types of debt that we should do without:

Payroll or Payday Loans

These loan facilities target employees who need an advance on their pay cheques, or just want to access unsecured debt. One large payroll lender charges just under 30 per cent fixed over the agreed tenor of the loan, so even if you pay it off early, you still owe the full interest amount.

Other institutions will forward the amount you need with a fixed amount to repay when you get your salary. The problem is that when you pay off the advance, you may still be unable to pay for your regular expenses for that month, and then the borrowing cycle continues.

Credit Cards

Credit cards by themselves are not a bad thing. The convenience of paying your bills without cash, or having access to money in the event of a sudden emergency can be big advantages of owning a credit card, as long as you pay your bill on the due date.

However, many people get caught in the trap of purchasing unneeded items simply because they can charge it, and don’t have the means of paying it back. Years later, they are still paying for things that they consumed a long time ago.

I have a client whose credit card balance ballooned to over three times the original charges. She had lost her job and chose to be in denial about her financial obligations. She stopped making payments and did not contact the bank to try to refinance, so late penalties and other fees were added on. Although she has been able to get a freeze on the interest charges, today she still struggles to pay off this crippling debt.

Money Lenders

The unofficial money lending business is quite profitable and rampant in Jamaica. If you ask the right people they can point you to lenders who will advance you money at quite exorbitant rates. For example, I heard of someone who borrowed J$10,000 from an informal lender and was charged J$150 every day until the debt was paid in full. T

hat works out to be 1.5 per cent daily, which when annualized is over 500 percent! Although this debt is extremely expensive, it is widely used because it is quick and hassle-free to acquire.

So what can consumers do to avoid high-cost ‘bad’ debt? The answer is to be disciplined and determined to live within your means. Too often we incur debt not because there is a genuine shortage of money to pay for necessities, but because of our desire to accumulate items that we cannot afford, like expensive mobile phones or large screen televisions.

Use your budget to work out what expenses your current income allows for, and then make a plan to either increase your income or reduce spending on unnecessary things.

For those who are already stuck in a ‘bad’ debt trap, next week we will examine strategies to dig your way out of debt.

Copyright © 2007 Cherryl Hanson Simpson. No reproduction without written consent.

DON’T MISS MY NEXT ARTICLE! CLICK BELOW TO RECEIVE IT IN YOUR EMAIL:

Subscribe to Financially S.M.A.R.T. by Email

Originally published in The Daily Observer, April 19, 2007

Cherryl is a financial columnist, consultant and coach. See more of her work at www.financiallyfreenetwork.com and www.financiallysmartonline.com. Contact Cherryl