The idea of loans has been around for as long as money has been around in society. There have always been people with more money who have gone into business doing just that. Today, this function is carried out by banks and other financial institutions, although there are still licensed (and also unlicensed) individuals also doing loans. Naturally, there are some instances when clients cannot pay back what they took, or they simply don’t do so. This is detrimental to both the provider of the loan and the borrower.
Zero Sum Game
When people forfeit on their loans, most institutions have to call a Australian credit management to go look for those individuals and get the money back. This is detrimental to all parties because the institution will be out of pocket on 2 counts (with the loan and with paying for a collector) while the defaulter will never have a moment’s peace. Eventually, if they do pay the loan back they will end up paying much more than they had to initially because of fines, accumulated interest etc.
Once again, this swings both ways. An individual who has defaulted on a loan is not going to be trusted by other institutions. After all, most of them do good transaction forms on their customers to make sure that they are not risks. On the other hand, an institution that carries a lot of defaulting loans is also suspect; why do people take advantage of it so much? Either way, it’s not a good look for the two parties. This means that, collectively, everyone loses out eventually. There have been plenty of instances where companies had to declare bankruptcy, not least because customers were not paying their loans back. When this happens, governments or other institutions end up bearing the weight of those missing funds.
In the open economy model that most countries follow today, there has to be a constant cash flow or the economy starts to fall apart. This is why hoarders are so looked down upon and banks always try to encourage people to either save money in them or spend it in the market. Banks and other financial institutes themselves use the money they have to give out loans, make investments etc. When the profits come back, interests for those with savings soar. This cycle cannot be sustained if a bunch of people decides to default on a loan.Thus, the settling of any outstanding payments is important not just to an individual’s reputation, but also to bigger institutes as every entity is connected in a cyclic economy of interdependence.