Financial default occurs when an individual or small business fails to meet the agreed-upon payments on a debt, meaning they fail to service their instalments on the approved loan or facility, such as a home loan, personal loan, overdraft facility, or credit card. Defaulting on payments can have significant consequences, affecting one’s credit rating (credibility with a financial institution), and access to future credit.

Firstly, default typically starts when payments are missed. Creditors may then report these missed payments to credit bureaus, leading to a decrease in credit score. 

This reduction can hinder the ability to secure future loans, obtain favourable interest rates, or even affect rental and employment opportunities.

For small businesses, the impact can extend further, potentially leading to a halt in operations or even business closure if critical funds become inaccessible. 

Suppliers and partners might also lose trust, which can strain professional relationships and affect operations.

In some cases, creditors might take legal action to recover debts, which could lead to the repossession of assets, or garnishment of earnings. For individuals, this means that assets like cars or homes could be at risk of being auctioned to recover the debt. 

For businesses, essential assets used in daily operations could be seized, severely disrupting their ability to operate effectively.

Rehabilitation after default is challenging, but possible. 

It involves arranging a manageable payment plan with creditors, debt consolidation, possibly consulting financial advisors, and consistently meeting new payment terms. 

Reviewing and adjusting budgeting practices to avoid future financial strains is crucial.

Educating oneself about the terms and conditions of financial agreements and seeking advice when financial strain first appears can prevent default. 

This means that when there are signs of financial distress, businesses or individuals should contact their bank before default to make arrangements. Regularly reviewing finances, implementing a budget and seeking ways to reduce costs can also maintain financial health and prevent the severe consequences of default.

* Eddie King is Bank Windhoek’s credit executive officer.