Strategizing personal debt

The month of January nicknamed “Jan-worry” has been considered by many as the longest month of the year, not because of the number of days it has, but the financial pressures associated with it. Due to the large range of bills such as school fees, rentals, festive season celebrations, black tax among others, a number of people would settle for borrowing and may need to deal with its consequences for a longer period of time. Because debt has both positive and negative impacts on personal finances, it is important to strategize when to borrow and how to manage debt in order to avoid falling into a debt trap with long lasting effects.

Evaluate your options

The first step in effective debt management is understanding that not all financial pressures require you to borrow even when loans sources may be readily available.

One of the major causes of personal indebtedness is the desire to sustain a lifestyle beyond the current earning means of an individual.

For example, you find that people would borrow to purchase a car at a time when it may not be necessary and do not incur significant transport costs but simply want to show others that they too can afford. While it is true that when one has a source of income, it is easy to borrow from lenders, it is also true that the loan can cause serious distortions to income if it is not used for productive purposes that enable one to pay back. When getting a loan, always ask yourself if it is something you cannot do without at that time and how the acquisition of that loan will be able to contribute to its repayment without regrets.

Some financial pressures may actually be a reminder that you need to broaden your income sources other than find an easy way out of borrowing which will eventually need to be repaid.

Some needs may be postponed, repositioned or met over a longer period and this gives a variety of options to be considered. This notwithstanding, borrowing when used productively can boost businesses, improve financial capacity and stimulate economic activity. As you contemplate borrowing, always evaluate other options available verses the actual benefits of the loan and then make carefully informed decisions. Remember, not all that glitters is gold, be cautious of your borrowing.

Avoid Perpetual indebtedness

While undergoing training to become a Direct Sales Agent for a certain bank, we were told that the easiest way to convince civil servants to join the bank was to tell them that they could access a loan within 24 hours of registering with us.

With the increase in lending business and simplified loan access, this story is not different for many people who want to borrow to with many financial needs. The provision of immediate finance by lenders acts as a catalyst to the economic ideas of many which can in turn boost economic activities in the country. However, the challenge has been that, some people would borrow without really understanding the terms and conditions accompanying the loan and end up in perpetual indebtedness.

I have often heard people complain that it seems that the financial institutions have continued to deduct monthly payment despite the earlier indicated cutoff period reaching and they feel they are being duped on their income.

However, this reasoning mainly arises due to the misunderstanding of how interest rate and loan payment conditionalities are set. It could be that the interest rate is variable and not fixed and so, when there are changes in certain factors, the lenders can either increase the payment period or increase the deductions per month.

To a layman, the lender may not have clearly explained what this means and may sometimes deliberately withhold this information because it works to their advantage. It is therefore important that, before you get a loan, consult someone who understands finance to guide you on acceptable terms that you should consider as you borrow.

Further, take time to ask the lender the relevant questions that may affect your repayment of the debt and also seek a clear explanation with illustrations if possible, on scenarios that lead to a default or increased repayment. It is your responsibility as a borrower to seek to understand the implication of a loan on your finances.

Role of lenders

It is no secret that when the economy is experiencing distress, the demand for money is on the rise and hence the mushrooming of many lenders. The significant rise in number of lenders has increased competition in the credit market and resulted in the use of various strategies, with some being outside the provisions of the law.

Where as the credit report ACT of 2018 and credit policy provides guidelines to lenders to ensure that the credit market is safeguarded, the lenders would still lend money to people that are heavily indebted, thereby making it difficult for them to pay back.

An individual could have loans from various lenders even when these lenders could have used the credit registry to check on paying habits and obligations as prescribed by law to ensure default risk is reduced. Poor loan repayment is the primary challenge for the survival and growth of microfinance institutions and hence lenders through due diligence can reduce the default probability of people that are already heavily in debt by denying them further credit unless in exemptional cases. Despite the competition for customers, credit worth people should be priority in order to avoid similar occurrence of the 2008 financial crisis. Equip loan officers with skills needed to identify and isolate potential defaulters from good borrowers and do not let winning more clients be your primary goal even when default rates are on the rise.

 Always remember that the more knowledge you have about financial issues, the less likely you are to put yourself in unplanned debt that you may fail to manage and hence the importance of reading more before acting.