Interest rates have significantly increased in the last three months. This means either your monthly repayment on your loan(s) has increased or for some, the monthly repayment may be the same but the tenor of the loan has been increased. If you had taken a loan of Kes 500,000 for 5 years to buy a car, previously at about 15% p.a. interest you would have paid Kes 230,000 in interest alone over this time. Now at an interest cost of up to 25% p.a. you will end up paying Kes 380,000 in interest costs over the same period of the loan. Remember the longer the loan period the more interest you are going to end up paying. So what can you do to manage this period better?
1) Refrain from taking any new loans. Cut the debt cycle completely. This is definitely not the time to take new loans unless you believe you will earn more than what you are going to pay in interest. Tackle your existing debts but the answer in managing your costs does not lie in more debt. Consolidating all your loans into one debt may look attractive but remember it will be booked as a new loan therefore will likely attract much higher interest rates than the other separate loans individually.
2) Make at least the minimum payments on all your loans. Make sure you are servicing all your debts to ensure your credit record remains clean. If you default on your payments the bank or any financial institution can blacklist you with the Credit Reference Bureau and you will not be able to borrow for 7 years after paying off the loan that you were blacklisted for. If your payment amounts have been increased and you feel that you cannot manage, please approach the bank and work out a repayment plan. There may be the option of increasing the term of the loan so that your monthly payments are smaller. However do this only if absolutely necessary as the interest you will pay is higher over a longer period.
3) Make additional payments into the loans. When you take a loan there are two components. The principal i.e. the original amount you borrowed say Kes 500,000. Then there is the interest that is charged to you e.g. 25% p.a. Each repayment you make comprises of both a portion of the principal and the interest. The interest for the next month is calculated on the remaining portion of your principal hence the term a “reducing balance loan”. The faster you reduce this principal the better. So any additional payments you can make over and above the minimum repayments towards reducing principal will enable you to pay off debt faster as well as reduce the amount of interest you will pay. Restructure your budgets. This is the time to find ways of cutting down on your expenditure and using that money to pay down your debt.
Waceke Nduati –Omanga| waceke@centonomy.com| www.centonomy.com