Want to Avoid Bad Debt? Pay Attention to These 3 Ways to Overcome It
Want to Avoid Bad Debt? Pay Attention to These 3 Ways to Overcome It
Every financing company must have had debtors, whether individuals or other companies, who experienced bad debt. In the financial world, bad debt is called Non-Performing Loan (NPL). If NPL cannot be managed properly, it will have a negative impact on the company's reputation.
There are many causes of debtors experiencing bad debt, including loss of main income, defaulting on payments, and many more. If a debtor fails to gradually pay off their debt, it will affect their credit score. If labeled as bad, debtors will struggle to apply for loans.
To understand more deeply, the article below will provide information on the definition, causes, impacts, and ways to overcome bad debt.
Definition of Bad Debt
In general, bad debt is a condition where debtors, both individuals and businesses, are unable to repay their debts to lenders on time. With such a condition, the credit score held by the debtor tends to be poor.
Causes of Bad Debt
There are many factors that cause debtor's credit to go bad, including:
- Poor Financial Management of Debtors
Before granting a loan, lenders usually check the debtor's credit score to determine how much debt they have compared to their income. This needs to be carefully considered. However, sometimes there are situations when debtors have things beyond their control, causing bad debt. What is meant by beyond control is poor financial management. - Debt for Consumer Needs
Often people have a desire to buy many things. However, these desires become something negative because they tend to lead to consumerism. If it can be suppressed or spent on other things, it is better for investment or business capital needs. If you have productive debt, it tends to be good for business because when you make a profit, you can pay off those debts.
Impact of Bad Debt
There are several impacts that you need to know when it comes to bad debt:
- Difficulty Getting Loans from Other Institutions
One reason why debtors find it difficult to get loans is because their credit score is not adequate. Even if the score falls into the category of Special Attention (DPK), there is still a possibility that debtors cannot get a loan. For companies, this also has a negative impact, especially on the Non-Performing Loan figure. If it's above 5%, be prepared for the company to have difficulty obtaining funding from creditors or other parties. - Higher Penalties and Interest Rates
Another thing that debtors should avoid and should immediately pay off their debt is penalties and interest. If debtors are late in paying installments, financial institutions will impose higher penalties and interest rates. Instead of lightening the burden, it will burden the debtor. - Difficulty Applying for a Mortgage Loan
Apart from difficulty in getting loans, another thing that debtors should avoid is late payments, which means they cannot apply for mortgage loans. With high costs and a long tenor, financial institutions will really pay attention to the debtor's credit history. If it's not smooth, it's impossible for debtors to apply for mortgage loans.
Ways to Overcome Bad Debt
To avoid higher penalties and interest, debtors are better off paying off their debt rather than facing bad debt. Below are three ways to overcome it:
- Rescheduling
The first thing to do immediately to overcome bad debt is rescheduling. In this case, the creditor extends the tenor so that the debtor can make payments. For example: initially the tenor given by the creditor is two years. However, due to the Covid-19 pandemic, the creditor extends the tenor to three years. - Requalification
Then, the second way that debtors can do to avoid bad credit is to apply for requalification. Things that can be applied for include changing payment schedules, changing payment periods, to other requirements as long as they do not change the credit limit. - Restructuring
The third way is somewhat difficult for debtors but it can happen. In this case, the creditor will provide quite good relaxation to the debtor. For example: changing requirements and applications, reducing or even eliminating interest rates so that debtors are only burdened with the remaining principal debt.
When understanding how bad debt can affect a debtor's business, debtors should pay their dues and settle their debts as soon as possible.
In the process of disbursing funds, creditors certainly need to undergo verification and credit scoring processes before disbursing loans to minimize defaults. Some creditors in the financial technology field use Brick because it provides API data solutions such as transaction data, employment data, and account data. Learn how Brick's solution for financing companies can help creditors in their business operations. ***
