Debt can make you either prosperous or bankrupt

Debt can make you either prosperous or bankrupt

By V. Anjaiah

JAKARTA (JP): Debt has become an essential aspect of modern
life. One can borrow money from a bank through a long-term loan
mortgage to finance the purchase of a house. We can buy a
cellular phone through a credit card. A car can be purchased on
installment basis through a finance agency. One can buy shares of
a company through margin trading.

Though debt is a lifeline for individuals, companies and
governments, everybody wants to be a debt-free.

Some people love credit and some hate it. Some avoid it. If
possible some would evade it. The smart ones (read conglomerates)
manipulate it.

An innocent housewife heard about the benefits from her
neighbors of having a credit card and watched how easy shopping
was with a credit card. She wanted to have it one.

She approached the nearest bank. After explaining this and
that, the bank staff informed her that every month she had to
clear her debt on time. Otherwise the bank would charge an
interest rate of more than 2 percent for month. She became
furious. She thought that it was free because nobody had ever
told her that she must pay back the amount used for shopping. It
was difficult for the stunned bank employee to convince her.

Another feature of debt is that it has to be paid back in full
at maturity with interest having been paid throughout the term of
the loan, sometimes the interest can be avoided and sometimes
with a haircut. Interest-free loans are the ones everyone would
like to have it.

Generally, repaying a debt is not as enjoyable as receiving a
loan. Some people are lucky enough to avoid paying their debts in
full.

In certain countries, natural disasters like floods, cyclone,
drought or earthquakes could become a relief for those who have
huge debts.

It is common practice in places like India and Bangladesh,
frequently hit by said disasters, for the governments to wave
bank loans in full or partially or declare them interest free as
a relief to the victims.

Keshavulu, an Indian public servant living in a small town,
Nalgonda, had made a lot of money over the years.

"I have been borrowing money from the local banks with low
interest and lend it again to my friends and relatives at a high
interest rate. My province (Andhra Pradesh) is always affected by
either a cyclone or a severe drought every two to three years.
Our government always provided us with not only assistance but
also debt relief measures. Though I was not a victim of any
disaster, I also benefited," Keshavulu said with a smile.

But in Indonesia, the case is different. If you borrow money
from the bank, there is no way you can escape the debt - even if
you are hit by the worst flood or earthquake. As long as you are
still alive, you have to repay the debt. And if you die, the
creditor could demand that your children pay.

Debt can make a person happy, worry or sleepless. It is a
friend in need. It can wreak havoc when your broke. It can make
you either rich or bankrupt. It's like gambling.

Money, debt and what one perceives can be done with it is
seductive beyond resistance for many. That's why some people
desire debt on any terms, despite high interest rates or payoffs
to middle men or corrupt bank officials.

Some people want to borrow money even when they don't need it.
And the persons in need generally won't get it.

Banks, credit agencies, finance companies, brokerages and
other agencies earn income from lending. They offer easy terms,
low interest rates and incentives to lure individuals, companies
and governments to borrow from them.

Debt is like a drama. The creditor and debtor are similar to a
hero and heroine. Despite their love-hate relationship, they need
each other.

Upon receiving a loan, the debtor thinks that the creditor is
a god, but during the months of repaying the loan with interest
that perception completely reverses in most cases.

The interest, both simple and complex, is the baby from their
relationship.

Not surprisingly, the baby becomes a burden for the debtor and
a boon for the creditor.

For a debtor, the villain is the debt collector while the
insolvent debtor is a detonator for the creditor.

The bank is the home for all the characters in the drama. A
bank may look solid but it remains a danger to itself and others.
Can one avoid a bank for financial needs?

"Yes," says a woman living in Jakarta, Evi Daneta, who
invented her concept of "home banking" or "own bank".

Since her marriage in 1996, she opened a bank account and has
been saving Rp 400,000 per month. She cleverly invests her
accumulated money in deposits (in both rupiah and dollars),
shares and mutual funds. She lends some part of that to her
relatives, friends and herself.

"Whenever I need money, I borrow from my own account and repay
it with 24 percent interest per annum. Whatever the bank does, I
will do it on my own. It's easy. Now my fund has around Rp 40
million. That means the total return on my fund is more than 100
percent", said Evi, who works for a private company.

Debts have to be managed properly. The purpose of the loan
should be clear. One must know his or her capability to repay it
or not. Otherwise things will be a mess.