There’s this common street saying that goes like Mwanaume ni madeni (A man must have debts) that sort of encourages people, especially the youth, to just jump on any loan available no matter the cost.
No one tries to get in debt.
It’s just one of those things that happen without your notice, or may even feel as if it’s out of your control.
People take loans when they need to cater to different expenses, such as buying a home or vehicle, seeking education or tackling emergencies, when ready cash is not available. But when not cautious, these loans can turn into a nightmare.
Take for instance Lamu West MP Stanley Muthama who is now drowning in debt even with a monthly salary of Ksh 625,000 plus allowances.
The MP is currently facing arrest for failing to pay a Ksh 10.9 million debt that he accrued seven years ago. The debt was part of a business transaction involving his trading company known as Stansha Limited.
Now, the MP only takes home a monthly salary of Ksh 28,000, too little to even fuel his V8 engines.
It’s a story we have seen so many times but the majority never learn. A huge salary doesn’t mean you can’t sink into debt.
A simple rule about debt is that if it increases your net worth or has future value, it’s good debt. If it doesn’t do that and you don’t have the cash to pay for it, it’s bad debt.
Muthama’s story reminded me of these recurring scenarios so I decided to list a few pointers that can help dodge this deep hole that only a handful manage to come out of.
Never borrow without reading the fine print
Lenders often mention the key details in the fine print of the loan agreement. Not reading the fine print could turn out to be a costly mistake for the borrower.
Things like prepayment charges, penalties, terms about rate revisions, and many other crucial points are mentioned in the loan agreement. So, don’t rush while taking a loan and read the fine print carefully before signing the agreement with your lender.
Don’t borrow more than you can afford to repay
It’s not uncommon for people to apply for a loan amount that is much bigger than their actual requirement. Later, when they realise they cannot afford to pay it back, they default.
As such, always ensure you can repay your loan in time. You can do so by keeping the loan amount under control so that you’re able to pay for the EMIs apart from other critical financial commitments.
Never Take a new loan when you already have a big debt
Ideally, your total debt obligations in a month should not be more than 40% of your monthly household income. A common trend I’ve seen is people taking a loan to settle another loan.
Having one big loan which you can repay comfortably is usually better than having multiple small loans which you may find difficult to keep track of and repay.
Pay your debts on time
Late fees add interest charges to your loan. To avoid moving backwards, always pay on time no matter what.
Have an expert by your side
I like to tell people, that there’s a difference between someone good at generating money and managing it. Managing your finances can be tricky at times and for sure you’ll need a financial advisor.
Make sure you have a financial expert whenever you are looking at such obligations. A financial advisor might sound like an unnecessary cost but in the long run, will save you millions.
At Marketcap Trainers, we do advise and guide you regarding your financial quagmires.
Market Cap Trainers offers personal finance education, Investment opportunities and other financial services. Just reach us through our contacts: Info@marketcap.co.ke or 0765 093983 for any inquiries.