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.