23/05/2024
MITIGATING THE INHERENT RISKS IN CONSUMER CREDITS
Consumer credits have been a good way to improve one's standard of living, or acquire some assets, which they could not have afforded otherwise. But consumer credits could easily lead the borrowers into a debt trap and eventual financial ruin.
The plight of some Nigerian students currently facing the threat of expulsion from their university in the UK, and could end up being deported back home, reminds me of the risk consumers face when they fail to properly assess the risks embedded in taking advantage of such credit transactions.
For example, I've always been amused at the feasibility of the proposals by real estate companies for prospective buyers to make down payments of 10% to 20% for real estate, and make good the balance by monthly instalments in 12 to 24 months. If a prospective buyer could only afford not more than 20% when commiting to the transaction, what are the prospects that his/her financial situations would so improve dramatically to enable him/her pay up the balance of 80% within a few months after?
I casually took up this poser with a director of one of such real estate advertisers at one of our meetings. I asked what happens when such prospective buyers could not afford to meet up with the payment plan? And his answers sent shivers down my spine: "that's their own problem!" I then asked what would then happen to the deposit and the initial instalments he would have paid? He confirmed that these would automatically be forfeited, as per the contract s/he would have signed!
I could not imagine the precarious situation a prospective buyer would have found himself/herself under such a credit scheme. Definitely, s/he may not be able to recover from such a financial disaster for a long time to come.
I also had the privilege to consult for a borrower who had raised a mortgage to finance about fifty percent of the cost he was purchasing a property in a relatively eyebrow area of Lagos. His mortgage contract which was for five years initially was fraught with challenges that could have been envisaged and provided for, to ensure the ultimate realization of the objectives of both the lender and the borrower. In this case, the contract was apparently drafted to afford the lending mortgage company exploits the borrower maximally. The interest rate, was way above the then prevailing market rate. He is also expected to continue paying monthly without default for the period of five years, notwithstanding any likely changes to his financial position, and/or the national and/or global economy.
Of course, all these changes were bound to occur, given the five years duration of the contract. And indeed, they occurred, with the attendant consequences of the borrower requesting just a three month moratorium to reset his finances. But the mortgage bank refused him, and it only afforded them the opportunity to trigger the draconian punitive penalty clause in their contract to make his financial situation much worse.
We came in when the mortgage was supposed to have been fully repaid, but for the cumulative effects of these penalties. By then, the borrower had repaid more than twice the amount he had borrowed, as principal, interest, and penalties, despite his financial challenges, including the setback to his business occasioned by the well known global pandemic and Nigeria’s two consecutive economic recessions.
Apparently, these were Shylocks waiting to take over his hard earned property at the slightest opportunity. But our intervention exposed their perfidy, and afforded the borrower to settle without getting to court.
Consumers have to be wary before they commit to contracts that could ruin them financially. Engaging the services of professionals negotiating the contract is buy far more rewarding than crying foul when the head would have been off. This is why there are strict regulations in places like the UK for mortgage lenders to intimate the prospective borrowers of the services of the independent financial advisers to help him navigate the complex financial proposals so as to make informed choices in the process of committing to a long term mortgage.
Our international students also need to avail themselves of such financial advisory services. I will generally not recommend that an average middle class family commit to an international four years undergraduate programme. The economic changes that are bound to take place in the period of the programme would expose such a family to unexpected financial challenges.
Running that programme at one of our private universities locally, to be capped with an international postgraduate education abroad, would be much more rewarding. The annual cost of the average undergraduate degree locally is lower than the cost of an economy ticket to and fro the UK, even on AirPeace.
