Avoiding the Debt Trap

As more Jamaicans become cash-strapped as a result of pay cuts and rising commodity prices, financial industry experts are warning consumers to beware of the debt trap. Put simply, that’s a scenario where borrowers are unable to make regular repayments on their debt because they aren’t earning enough to do so while living comfortably.

Speaking to Dashan Hendricks — business content manager at the Jamaica Observer during the Jamaica Observer Business Webinar on September 29, 2021 — financial advisor Marlon Campbell argues in favour of investing or saving to achieve financial goals instead of turning to banks or other lending agencies for a loan. However, district vice-president of Scotiabank Jamaica, Yvett Anderson, contends that “debt has helped several persons from a personal and professional level. The key is taking it on responsibly.”

District vice-president of Scotiabank Jamaica, Yvett Anderson
(Photo: Jamaica Observer)

Anderson highlighted that taking on responsible debt involves full disclosure and transparency of the borrowers existing liabilities in addition to understanding the risks and benefits. She says that’s a strategy her institution employs to ensure consumers make sound financial decisions.

“At Scotiabank before we lend you money we have a discussion and a key part of that is asking you to share with us your total exposure, how much do you owe and then we lend you a percentage of that relative to your income. As a rule of thumb, your debt should not go beyond 45-50 per cent of your gross salary,” Anderson continued.

While there’s no data on the number of Jamaicans living in debt, banks have disclosed that since the start of the novel coronavirus pandemic they have seen an uptick in borrowers defaulting on their debt. This has led financial institutions to implement cauterising measures like moratoriums, debt refinancing, interest waivers and payment suspensions. From a macro-economic perspective, the Bank of Jamaica (BOJ) has lowered its indicative monetary policy interest rate to a historic low of 0.50 per cent. All in an effort to control inflation and make the cost of money cheaper.

At the same time, business development manager at Victoria Mutual, Mendel Thompson, says there are certain signs which indicate that a debt trap may be looming.

“A person can know when they’re going into a debt trap if they don’t have enough income to support the debt. I don’t necessarily believe that no debt is the best, because not everybody can save in order to pay for all the things that they want. They’re not necessarily generating cash flow fast enough to be able to do it,” said Thompson.

However, like Anderson the business development manager believes that taking on debt should be done responsibly.

“We don’t believe that getting debt for little consumer things like going to party is good debt, you want debt that is going to be improving you and not put you in a bad situation,” warned Thompson.

He further illustrated that “if it is that you have sufficient income that you could pay for it cash or you’re gonna be getting that income right away, no problem. But you don’t want to be taking debt for an event that you’re gonna have to be paying back for months and years after that, it’s not the wisest thing to do.”

In the meantime, Campbell maintains that borrowers who find themselves stuck in a debt trap may have to consider difficult and sometimes unpopular solutions.

Financial advisor Marlon Campbell says, “If you’re serious about getting yourself out of debt, you might have to make hard decisions.”

“If you’re serious about getting yourself out of debt, you might have to make hard decisions like selling other assets to make ends meet.”

The Jamaica Observer Business Webinar is held every last Wednesday and is broadcast live on various social media platforms. The webinar is powered by Flow and Victoria Mutual and can be accessed on the Jamaica Observer website under the WEBINARS window.