Debt & Finance - Money Management

By taking a pro-active approach to managing your monthly income and expenses you find yourself in a position to better handle situations where you face the risk of falling behind on your monthly financial obligations (i.e. overdue rent and/or utility bills) and avoid the risk of accumulating debt.

If you fall behind on your monthly financial obligations and find yourself accumulating debts which you are unable to repay, it is likely that your creditors will commence legal proceedings to force repayment of the amount owed to them. Alternatively, your creditor may refer your bills to a formal debt collection agency.

If your debts are referred to a debt collection agency it is likely that your creditor will have instructed them to commence legal proceedings in order to force repayment of the amount owed. It is important to note that if your creditor refers your debt to collection debt agency, in addition to repaying the amount owed, you will likely find yourself having to pay debt collection fees and administrative fees.

Paying off expenses and debt, increasing savings and saving for the future can be hard if you do not know where to focus your energy. Making sure that you are earning more than you are spending is priority number one. If you do not have positive cash flow (i.e. you make less than you spend) this will likely result in you being unable to meet your financial goals.

To help ensure that you have positive cash flow Consumer Affairs cannot understate how important it is to be aware of what is the difference between a “Need” and a “Want”. Being aware of what is a “Need” and what is a “want” will help you more easily prioritize your spending and align your monthly budget with the things that matter most in your life.

The human motivation theory developed by American psychologist Abraham Maslow proposed a five-level model of fundamental human needs; otherwise known as “Maslow’s Hierarchy of Needs”. Basic needs are the most critical and must first be satisfied before a person can advance to meet newer and higher-level needs. The basic human needs, in order of priority, are:

1. Physiological Needs: food, water, sleep, clothing and homeostasis.

2. Safety Needs: security, stability, freedom from fear, anxiety and chaos;

3. Belonging and Love Needs: giving and receiving affection, friendships, intimacy and family;

4. Esteem Needs: need for self-esteem and the esteem of others; and

5. Self-actualization Needs: the realization of one’s full potential.

Higher priority needs (i.e. physiological needs) have to first be met before addressing lower priority needs (i.e. self-actualization) or even wants (i.e. luxury items, vacations, brand new car instead of second-hand car, etc.). Fortunately, Maslow’s Hierarchy of Needs can be effectively applied to monthly budgeting and can help guide a consumer to ensure that their most important financial obligations are budgeted for first.

To make certain that your priority, physiological needs are addressed, Consumer Affairs advises that you prioritize the following monthly expenses when developing your monthly budget:

1. Food;

2. Water;

3. Clothing; and

4. Shelter

Once your physiological needs are addressed and budgeted for, it is then recommended that you account for the expenses associated with ensuring your safety:

1. Rent;

2. Mortgage;

3. Insurance;

4. Expenses related to your employment; and

5. Social utilities (i.e. electricity and electronic communications).

Once your safety needs are addressed and budgeted for, your remaining monthly income can then be used to address your needs regarding “love and belonging” and “esteem”. Expenses commonly associated with love and belonging and esteem are typically considered “luxury” expenses or “wants” and include, but are not limited to:

1. Gifts

2. Travel and vacations;

3. Entertainment and Dining Out;

4. Fitness and gym memberships;

5. Luxury spending;

6. Hobbies; and

7. Charitable contributions;

Consumer Affairs appreciates that you may agree or disagree with the categories that certain expenses have been categorized as, but it is important to note the underlying principle of prioritizing your needs over your wants and luxury spending.

If you are aware of the fact that you owe money to a creditor (i.e. a provider of a consumer good/service who you have not yet repaid in full), Consumer Affairs recommends that you contact your creditor and communicate that you want to pay off your debts through instalments as part of a voluntary repayment plan.

In addition to communicating your desire to enter into a voluntary repayment plan, Consumer Affairs advises that you ask your creditor to:

Confirm all of the details associated with your debt(s);
Stop chasing you for payments while you work out what you need to do; and
Withhold adding further interest and charges so that the debt doesn't get any bigger.

As part of the negotiation of a voluntary repayment plan, Consumer Affairs recommends consumers to propose a realistic repayment plan that you will be able to consistently meet; while still being able to pay your other monthly expenses.

Once you have agreed to a repayment plan with your creditor(s), Consumer Affairs advises that you send a follow-up letter or e-mail outlining what was discussed and what was agreed to. This way you have written communication acting as a record in the event your creditor decides to refer your debt to a debt collection agency and/or take you to court.

If you decide to not contact your creditor(s) regarding your financial circumstances and fail to enter into a repayment plan to pay for outstanding bills, your creditor will likely transfer your outstanding debt to a debt collection agency or pursue legal proceedings themselves. If your debt is transferred to a debt collection agency, in addition to having to repay your debt you will likely incur additional costs, including interest and legal fees.

If you hold a debt with a utility provider (i.e. One Communications Ltd., Digicel or the Bermuda Electric Light Company), but you cannot afford to pay the debt in full, Consumer Affairs advises that you contact your utility provider and negotiate a voluntary repayment plan that will allow you to:

Repay any debt you owe through extra monthly payments;
Continue to pay towards your monthly bill; and
Continue to obtain the benefits of the services being provided (i.e. mobile phone plan, residential electricity).

It is at this stage Consumer Affairs advises consumers to exercise caution before they contact their creditor(s); particularly if they know they have held a debt with a creditor for an extended period of time and the creditor has not actively forced repayment.

Under the statute of limitations your creditors have a limited time to take you to court to repay a debt (e.g. for civil debts the time limit to pursue a claim is 6 years). If you have not received court papers after 6 years your creditor usually cannot take you to court for the amount that you owe.

If you contact your creditor has the time limit for them to pursue repayment of the debt has pass, the time limit for your creditor to pursue legal action against you restarts if you write to your creditor or make a payment. Such communication is considered an acknowledgement of debt.

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At some stage in their life most people will need to borrow money from a financial service provider and/or a personal lender in order to:

Pursue the purchase of large assets (i.e. motor vehicle, home);
Finance educational endeavors;
Provide financial relief when faced with a personal emergency; or
To fund a special event (i.e. weddings, birthdays, etc.).

If you are considering borrowing money, Consumer Affairs advises borrowers to ensure that they have an open and honest relationship with their financial service provider and/or personal lender and communicate if and or when they face changes in their personal financial circumstances.

It cannot be overstated how important having open and honest dialogue with your financial service provider and/or personal lender is as this will ensure they are able to offer services that specifically account for your individual needs as your personal circumstances; particularly when you are facing financial difficulties.

Failure to regularly communicate with your financial service provider, particularly in instances where you are finding it difficult to repay any monies borrowed, could result in you facing limited financing options.

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There are lots of different ways to borrow money, either through a personal lender or through a financial service provider. Before borrowing it is a good idea to find out about the different options available to you so that you can choose which financing option suits your needs (i.e. pricing and interest charged, security required, flexibility in the terms and conditions of borrowing, etc.).

With a personal loan a consumer will normally borrow a fixed amount of money from either a financial service provider or personal lender to facilitate the purchase of a high-priced consumer good and/or service. The personal loan will typically be repaid by set monthly instalments over an agreed period of time (i.e. the term of the loan).

In conjunction with making the funds available to the borrower, the financial service provider or personal lender will apply an interest rate to the amount borrowed in order to generate a profit and account for the risk of lending money (i.e. principal + interest). When a lender extends a personal loan to a borrower it is common practice for the lender to apply a variable interest rate to the amount borrowed (e.g. Base Rate + 4.5%). As the Base Rate applied by your lender goes up and down, so will your monthly loan payments.

Alternatively, depending on the strength of your personal financial circumstances and risk associated with borrowing your lender may elect to charge a fixed rate of interest and sometimes extra fees. A fixed rate of interest is commonly made available to low-risk borrowers (i.e. high net wealth) that are capable of securing their personal loan through some form of high valued collateral (i.e. a pledge of cash assets, a chattel over your motor vehicle or home, a taxi license).

As a borrower you will usually be asked to make the repayments to your personal loan via direct debit from your bank account. If you do not make the payments on time, it is likely that you will be charged a late fee.

Appreciating the high costs associated with borrowing and the interest that is applied, it is important to remain mindful of the fact that your lender may be willing to afford you the option of being able to pay off the entirety of your personal loan at any time. Consumer Affairs suggests that you speak with your lender when you apply for a personal loan and look at the terms and conditions of credit agreement provided by your lender to confirm whether you can repay the personal loan in full at any time. A credit agreement is the document that you and your lender signed when you took out the loan.

It is important to note that although you may request your personal lender for permission to repay the entirety of your loan early, they may reject your request as lenders generate their profit based on the interest charged for borrowing. Allowing a borrower to repay their loan early will effectively result in the lender cutting into their anticipated profits.

Whether you are able to obtain a personal loan subject to a variable or fixed interest rate, personal loans can be secured or unsecured. It is important to note that any collateral offered to secure a personal loan may be at risk if the borrower is unable to keep up with the repayment schedule. With respect to an unsecured loan, although your house and/or personal assets are not immediately at risk if you fall into arrears, your personal lender can take court action to make you pay the money back.

If your loan repayment schedule becomes unmanageable (i.e. high risk of inconsistent or non-payment), or are struggling to repay a loan, Consumer Affairs advises that you contact your lender as soon as possible as you might be able to get your monthly loan payments reduced, amended (e.g. principal only, interest only) or paused. Your lender might agree to:

Reduce or stop charging interest on your arrears;
Be flexible with the amount you have to pay back and how long you have to pay it;
Allow you to pay a small amount or nothing for a fixed amount of time; and/or
Help you make a payment plan.

When negotiating an adjusted repayment plan Consumer Affairs advises that you think carefully about what additional payments you can afford; in addition to continuing to repay the original amount borrowed.

Consumer Affairs cannot undertake how important open communication with your lender is. If you fall on uncertain times, open dialogue with your lender will help them assist you during such times. Failure to communicate will likely render it difficult for a lender to consider financing options if you have gone too long without making a repayment or for failing to communicate the change in your circumstances sooner. If you decide to sweep your difficulties “under the rug”, this will likely result in making your life more difficult in the future.

Credit is another word for borrowing. Similar to obtaining a personal loan and borrowing money, when you get a credit card you have to sign a credit agreement. A credit agreement is a legal document which sets out what you and the lender are agreeing to (i.e. the amount of credit that is being extended and at what interest rate, etc.).

A credit card is particularly useful for consumers that have consistent income as it affords them the ability to facilitate purchases prior to receiving their income. Once their income is received consumers in possession of a credit card typically apply their received income immediately towards the repayment of their credit card balance in order to avoid incurring unnecessary interest charges.

Credit cards can be used to buy goods anywhere, including in physical stores, over the phone, online or by post. When a financial service provider approves a credit card you can spend up to your approved credit limit. The amount of interest varies between financial service providers and Consumer Affairs advises that you shop around for the best deal. If you go over your credit limit the provider may charge you an overage fee. Some financial service providers also charge an annual fee.

There are other types of plastic card (e.g. debit cards and prepayment cards) which are not credit cards. When you buy something on these cards you are using money which is already in your bank account or loaded onto the card.

If you pay off the total amount on your credit by the due date, you will not be charged interest. However, if you do not pay off the amount of credit used before the due date (i.e. before the end of the month) you will be charged interest on the amount outstanding, and the interest charged will be applied the credit balance. It is at this stage Consumer Affairs cannot over emphasize the importance of paying off credit card bills in order to avoid incurring interest charges and potentially having to face compound interest.

For the sake of clarity, compound interest is the interest applied on the original amount borrowed and the accumulated past interest. For example, if you use your credit card which is subject to 10% to facilitate the purchase a $100 item, and you do not repay your balance by the end of the month, you will be charged $10 interest (i.e. you would owe your financial lender $110).

If this balance remains unpaid at the end of the next month you will be charged $11 interest (i.e. the 10% on the outstanding balance of $110) and your credit card balance will be $121 at the end of the next month. When applying this example over the course of 6 months to a year it becomes clear how risky a credit card may be for a consumer if not actively managed.

A mortgage is a loan that is taken out to buy a house and/or property. A mortgage is usually for a long period of time and typically lasts between 25 and 30 years and are paid back through monthly instalments. In addition to the repayment of the amount borrowed, mortgage lenders will apply interest to account for the risk of lender and ensure that they are capable of generating a profit as a result of extending the credit to the borrower (i.e. principal + interest).

Typically, the mortgage will be secured through some form of collateral, such as the home itself and/or additional personal assets. It is important to remain mindful of the fact that if the home being purchased is used to secure your mortgage that the bank retains ownership of your home and has the right to repossess your home if you do not keep up with mortgage repayments. If your house is repossessed, the money from the sale will be used to repay the outstanding balance of your mortgage.

Similar to a personal loan, the cost of the mortgage depends on the interest rate and the type of interest rate that may be applied varies, fixed rate or variable rate. In addition to acquiring a mortgage to purchase a home, you can get additional loans secured through your mortgage for things like home improvements so long as you have positive equity in your home (i.e. the value of your home exceeds the remaining balance of your mortgage). This is form of borrowing is typically called a second mortgage, second charge or further charge.

When determining whether it is favorable to extend a line of credit to facilitate the purchase of a home and/or property, your lender will likely ask you for a lot of information and supporting documentation indicating proof of your monthly income, expenses and spending habits. Lenders will check to see if you can consistently meet the mortgage payments, while paying other household costs and in doing so will determine an appropriate level of interest that will mitigate their risk of lending. Lenders will also consider how you would manage repayment of the mortgage if interest rates were to go up in the future, or if there was a negative change in your income.

If you take out a mortgage you are likely to be charged legal and administrative fees, so it is advised that you shop around for the best deal before making a decision. Furthermore, Consumer Affairs advises borrowers to make sure that they only take out a mortgage they can afford and to consider the possibility of the interest rate being applied to the mortgage increasing and/or their financial circumstances being negatively impacted in the future. It cannot be overstated that the life of mortgage is a very long time and a lot can change during this period.

At this stage Consumer Affairs further emphasizes the need for borrowers to ensure that they regularly communicate with their lender; particularly when faced with financial difficulties. If you fail to regularly repay the amount borrowed your lender will send you notifications of non-payment and communicate warnings of advancing legal proceedings if you continue to not pay.

If you are at the stage in which the bank is seeking possession of your home due to non-payment, and they have commenced legal proceedings for repossession, it is likely too late to negotiate a repayment plan and/or discuss refinancing options with your lender.

Furthermore, if your lender repossesses your home your lender is under no obligation to ensure that when they sell your property at fair market value. For further guidance on mortgage management, please refer to the Debt & Finance - Mortgage Management page on the Consumer Affairs website.

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If you decide to borrow money (i.e. personal loan, mortgage, home equity loan) your lender will conduct a risk assessment in order to determine how much money they can lend you in accordance with their internal lending and risk policies. As part of your lender’s risk assessment, your lender will take into account the following criteria:

Income, investment interest, commissions, and other verifiable sources of income;
Expenses and outstanding debts;
Debt-income ratio: which is combined debt and housing expenses, which should not exceed 50% of your monthly income.
If obtaining a home equity loan, your lender will seek to review at least two property appraisals conducted within two years of your loan application, to ensure its market value is sufficient collateral to support your loan; and
Credit history (i.e. your past debt record and your ability to consistently make payments toward paying off your debt);
Age (i.e. if you are 50 years or older, this will influence the length of the loan);
The size of the down payment you are able to make towards the securing the loan; and
Additional collateral (i.e. cash held, personal guarantees, joint & several guarantees, other property with value such as cars, boats, commercial and residential property).

As part of your loan application you will likely need to provide the following information and supporting documentation:

Completed application form;
Proof of employment and income (i.e. a valid employment contract or bank statements indicating monthly income);
Copy of cost estimate report from a quantity surveyor if you are considering home renovations;
Quotes from construction contractors if you are considering home renovations;
Proof of rent or existing mortgage payments;
Copy of a utility bill (i.e. electricity, electronic communications, water) dated within the last two months of the date you submit your loan application in order to verify proof of residential address;
A detailed copy of your real estate agent’s listing if you are seeking to purchase a home;
Satisfactory credit references;
Completed personal financial statement;
Proof of available security (i.e. title deeds on your home, motor vehicle, boat, etc.)
Valid Identification (i.e. driver’s license, passport);
Construction quote;
Approved plans in place;
Estimated market value upon completion of construction project, if applicable.

The above-mentioned criteria will influence your lender’s decision to offer you financing and the terms and conditions which may be imposed (i.e. your approved loan amount, the mortgage type, the size of your monthly payments, your mortgage interest rate, and the term length of the loan).

Financial service providers rely on a credit risk score system to decide how much risk is associated with lending to you. Each fact about you is given points. All the points are added together to provide the lender with a credit risk score. The higher your score the more credit worthy you are.

Financial service providers set a threshold level for credit scoring. If your score is below the threshold, they may decide to not to lend to you or to charge you more if they do agree to lend. Different lenders use different systems for working out your score.

It is important to remember that lenders are not acting in your best interest when offering you financing as they know they can likely rely on any collateral provided to secure the loan in the event you default on loan repayments.

Given the inherit risk associated with borrowing, Consumer Affairs advises potential borrowers to shop around for the best terms and conditions before agreeing to enter into a loan agreement with a lender (i.e. complete loan applications with at least three financial lending institutions and schedule an appointment with a qualified loan officer at each financial institution).

After shopping around with potential lenders and having review the terms and conditions upon which they intend to lend, Consumer Affairs advises that you conduct your own personal financial assessment and develop a monthly budget in order to determine whether you will be able to consistently make payments.

Once a loan application is submitted, pre-approval for a specified amount may be given if your lender considers your request to borrow low-to-medium risk. Pre-approval gives you the security of knowing that when you find your dream home you can act quickly on the acquisition. The process of obtaining pre-approval is typically free and are usually valid for three months; but you can apply for an extension with your lender if needed.

As part of the approval process, your financial service provider may consider imposing one or all of the following terms and conditions in your financing agreement:

Payments may be interest-only until construction is completed. This period may last up to one year;
There may be an initial fee (a percentage of the total borrowed) on the borrowed amount;
Terms and rates may be subject to change without prior notice;
Depending on the size of the loan, they may ask to meet with you and your contractor to discuss terms and conditions;
During the construction, they may visit your site; and
They may require a property valuation to be completed by a qualified appraiser.

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Once you have chosen the type of borrowing that suits your needs (i.e. personal loan, mortgage, credit cards, overdraft), Consumer Affairs advises that you look around for the best credit deal and get a few quotes so that you can compare the costs and other terms of the agreement.

If you are borrowing jointly with someone else, make sure you both understand all the terms and conditions associated with “joint and several liability”. If someone else agrees to secure your loan and pay the loan if you don’t pay it, they are called a ‘guarantor’.

Make sure your guarantor understands all the terms and conditions, including when they would have to pay the loan instead of you. For further guidance on the impact of joint liability please refer to the Debt & Finance – Mortgage Management page on the Consumer Affairs website.

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Money management

Personal Budgeting

Borrowing Money and Credit

Types of Borrowing and Credit

Standard Lending Criteria

Borrowing and Shopping Around