Think Before You Borrow

  One of the main areas that most people will have to deal with in managing their personal expenses is borrowing. Over the last ten years access to personal loans has continued to multiply and financial institutions continue to come up with products that entice people to borrow. There are all forms of credit from Sacco loans, credit cards, mortgages, personal loans, education loans, salary advance loans etc.  The loans themselves are not bad but rather how we use these loans.  I have come across many people struggling with debt and many times they default to blaming the bank for their situations, high interest rates.  Other times the employers for the salaries that are now inadequate. No one ever put a gun to your head and forced you to take a loan. Debt can work for you or against you. Here are a few things to consider before you borrow.

1. Firstly, why do you want to borrow?  The answer to this question is what will tell you whether you need to borrow money or not. There are good reasons to borrow and then there are some bad reasons to borrow. A lot of the borrowing that people are doing is to sustain their own or someone else’s lifestyle.  This is not an intelligent reason to borrow.  Think about it this way. Imagine you have two potatoes to eat every day.  One day you feel greedy and want three potatoes.  You will have to borrow a potato from someone else.  However it means that the following day, from your two potatoes you will have to pay back the one you borrowed.  That means on that particular day you will only have one potato.  You have to ask yourself whether being excessively full on the day you borrowed the potato is worth the hunger on the day you only have one potato to eat? When we borrow for lifestyle we are consuming the money just like eating potatoes.  Once eaten there is nothing really to show for it.  We may be borrowing to literally eat, entertain ourselves, buy clothes, travel, pay rent, school fees etc.  At one point the borrowing will get to point where you may have to go hungry i.e. make drastic sacrifices to pay back the loans by cutting down on expenses. If the borrowing you are doing is going to lead you down this path don’t do it.
2. Can you really afford to borrow? Debt is attractive because of the lump sum you receive.  However when you take a loan, you will be required to make monthly repayments to service that loan.  This means unless there is an increase in income you will have to give up something.  This monthly repayment you will have to make will need to come from somewhere. For example say you are earning Shs 70, 000.  You take a Shs 500 000 car loan that will cost you Shs 12, 000 per month.  If you were already spending Shs 70, 000 every month, you really cannot afford this loan.  To service your loan you will have to cut down on something.  You may need to find somewhere to live that is Shs 12, 000 cheaper.  Or cut down on food, entertainment, clothes etc.  Many people never think through this.  They don’t identify what they have to cut down and they then find themselves borrowing Shs 12, 000 per month through something like their credit card or loans from relatives. This is very different from someone who has received an income increase of Shs 12, 000 and then decided to buy a car. In that case the loan repayment does not impact their lifestyle. Do a simple budget and understand if you can actually afford it or be clear what you are willing to give up to borrow. The temporary relief that comes form receiving that money will be soon replaced by a lot more pain than you are going through if you do not do this thinking.
3. When does borrowing work for you?  Firstly even though you have had to take a loan understand that you can actually pay it faster and pay the bank less interest.  For the same car loan example an extra Shs 10, 000 into your monthly payment will save you over Shs 100, 000 in interest costs and cut 3 years off your loan. If you do have to borrow for whatever purpose, pay your loan back faster. Secondly what is referred to, as good debt will make money for you.  This is when you borrow the potato because it will help you make another two potatoes.  When loans are used for proper investment purposes that give returns over and above what the loan cost you, you are in a better position. The same Shs 500, 000 can be put into a business venture that generates Shs 1 million.  The loan has in this case provided a benefit. However be very careful about the investment you are making and ensure you have the correct information.  If the investment/business does not work out remember you will still have to service the loan.