Bad Credit: Causes, Impact, and How to Overcome It

Bad credit or also known as unproductive loan (NPL) can occur in the process of lending funds, when the borrower cannot pay the payments or debts that must be paid. There are many causes of bad credit, for example, if the borrower loses his main income and finally is no longer able to pay the payments.

If the debt payments are not repaid immediately, the credit score of the borrower will decrease. Thus, with a bad credit record, of course the borrower will have difficulty obtaining loans in other financial institutions.

In addition to the loan, bad credit will also have a negative impact on financial institutions such as banks or financial companies. Therefore, this article will review everything from knowledge to how to overcome it.

Also read: Here are the advantages and disadvantages of home credit

What is Bad Credit?

Bad credit is a term used in the banking and financial world to describe a condition in which a borrower fails to repay a loan that has been provided by a financial institution such as a bank. Bad loans can occur for a variety of reasons, including the borrower’s inability to follow a payment schedule, inability to repay the loan due to poor financial conditions, or even fraud.

When a loan is considered a bad loan, it means that the bank or other financial institution has suffered a financial loss. Because the loan cannot be repaid, the financial institution must bear the loss. These actions may include pursuing the borrower to repay the loan and others.

Bad credit can have a negative impact on banks or financial institutions that provide loans. This is because financial institutions have to bear financial losses due to bad loans, which can affect financial performance and even lead to bankruptcy. Therefore, it is important for banks or other financial institutions to minimize the risk of bad credit.

Credit rating

Smooth credit or commonly called credit fluidity is a condition in which the borrower can repay the loan on time according to the agreed payment schedule. However, the classification of credit liquidity may vary from one financial institution to another. Here are some of the general classifications used for credit liquidity:

1. Smooth

It is said that the credit is current if the borrower has repaid the entire loan amount and interest in a timely manner according to the agreed payment schedule. There are no arrears or delays in payments.

2. Problematic

Credit is said to be problematic if the borrower has exceeded the agreed payment term. These arrears or delays can be caused by many factors, such as financial inability or financial difficulties.

3. Jam

It is said that the credit is bad if the borrower has exceeded the agreed payment term for a long enough period of time and has no intention of repaying the loan. In this condition, financial institutions can take steps to recover the lost funds, such as the sale of collateralized assets or legal action.

4. Under Restructuring

It is said that the credit is in restructuring if the borrower and the financial institution have agreed to change the schedule of payments and the amount of payments to adapt to the financial condition of the borrower. This is done so that the borrower is always able to repay the loan and avoid problematic or bad conditions.

It is important to remember that the classification of credit liquidity can vary from one financial institution to another. It depends on the policies and procedures adopted by each financial institution.

Causes of Bad Credit

There are many causes of bad credit, including:

1. Poor ability to pay: Poor repayment ability is a common cause of bad loans. This happens when borrowers do not have enough income to pay off their loans.
2. Inability to manage finances: Failure to manage finances is a frequent cause of bad credit. Borrowers who are unable to properly manage their finances often take out too many loans and are unable to pay them back.
3. Fierce business competition: Fierce business competition can lead companies to take more risks and owe more. If a business does not reach its sales target, then the business may have difficulty paying its debts.
4. Government Policy Changes: Sudden changes in government policies can impact businesses and borrowers. For example, an increase in interest rates can increase loan costs and make it difficult for borrowers to repay their debts.
5. Fraud: Fraud or fraudulent actions by borrowers or other parties can result in bad loans. For example, borrowers who submit false applications or use false documents to obtain loans.

In many cases, loan repayments are caused by a combination of the above factors. It is important for financial institutions and borrowers to pay attention and minimize credit risk by conducting careful credit assessments and following good credit risk management practices.

Impact of Bad Credit

Bad credit can have a significant impact on loans. Here are some of the impacts of bad credit that can happen to borrowers:

1. Damage to credit reputation: Bad loans can damage the borrower’s credit reputation and make it difficult for them to get a loan in the future. Because financial institutions often check borrowers’ credit records before making new loans, bad credit can make financial institutions reluctant to provide loans.
2. Difficulty getting a loan in the future: If a borrower has a bad repayment, it is difficult for them to get a loan in the future. Although borrowers are able to secure loans, they may be subject to higher interest rates and tighter terms.
3. Potential loss of collateralized assets: If the borrower applies for a loan with a guarantee. This can lead to the loss of collateralized assets and damage the loan.
4. Financial and psychological stress: Bad payments can cause financial and psychological stress for borrowers. Borrowers can feel anxious and worried about how they will pay their debts, and this stress can affect their mental and physical health.
5. It can hinder financial growth: If the borrowers have bad credit, this can hinder their financial growth. Because borrowers must allocate their money to repay debts, they will not be able to invest their money for other purposes that could help increase their wealth.

Therefore, it is very important for borrowers to make sure that they can repay the loan before applying for a loan. Borrowers should also pay attention to interest rates and other requirements before deciding to take a loan to avoid bad credit.

How to overcome bad credit

Bad loans can be a serious problem for lenders and financial institutions. Here are some ways to deal with bad credit:

1. Good communication

Borrowers who have difficulty paying their loans should contact their financial institutions as soon as possible. By communicating with financial institutions, borrowers can find out what alternative payment options or debt restructuring negotiations may be available.

2. Debt restructuring

Debt restructuring is a way of changing the terms of existing credit to help borrowers repay their debts. This may involve changes in interest rates, payment terms, or smaller payments over a period of time.

3. Extension of Payment Time

Financial institutions can provide an extension of the payment period if the borrower has difficulty repaying the loan. Extended payment terms give borrowers more time to repay their loans and prevent bad credit.

4. Interest rate renegotiation

Financial institutions may offer lower interest rates or discounts to borrowers who have difficulty repaying loans. This can help borrowers pay off their loans and prevent bad credit.

5. Asset Sales

If the borrower defaults on the secured loan, the financial institution can sell the collateralized asset to pay off the debt. However, financial institutions must ensure that the asset sale process is carried out fairly and in accordance with applicable law.

So that’s a little explanation of bad credit that is common in the banking world. Don’t let yourself be one of those who experience it. Also ensure your ability to take the credit offered.

I hope that is helpful!