Hoping you are well. I am a high school teacher, I took a loan from microfinances (Platinum and Izwe) at a time when the banks and such would not have lent me money, but their rates have turned out to be too hefty for me. Please advise me how I can deal with this situation, keeping in mind that I need to develop myself.
Thank you for your email. We take note of the stresses you are experiencing while repaying the loans, and also of your desire to develop. It is not clear from the short brief whether you utilised the borrowed funds towards defraying emergency expenses or for personal development.
You mentioned, however, that commercial banks could not have come through for you at the point of need, as the reason for heading to two high-cost lenders.
This suggests that you had made some comparison between Platinum, Izwe and commercial banks. Nevertheless, you borrowed comparatively expensive money and perhaps need to repay over a shorter term than a bank would have offered.
A high interest rate and a short repayment period translate into higher monthly instalments, with the repayment period contributing the highest impact on the size of the monthly instalment. There are three or so options available to you to lower your stress, but first, a few important observations about loans for enhancing your financial literacy situation.
Setting financial goals is usually followed by investment actions. Investment actions comprise the purchase of assets to actualise the plan and subsequently regular review and rebalancing of the assets by their contribution of risk and returns to the whole portfolio.
Savings and borrowing facilitate investment actions. Savings improve your credit worthiness besides enabling you to establish a fund to fall back on when unexpected expenses (emergencies) come our way in the ordinary course of life. You should ideally borrow to activate investments, and less for personal consumption.
Financing personal situations with credit tends to lead to circles of debt unless the underlying cause is solved permanently. Micro credit institutions’ focus is to provide access to working capital for the needs of small business owners. These business owners are unable to access credit from the mainstream banking system and usually do not have security to offer.
The products are largely short-term and attract higher interest rates, usually at least 2 percent per month (24 percent per annum) to cover for the high risk associated with such a lending. Their products are therefore not friendly to personal needs that tend to require longer terms to repay. You are therefore rightfully paying hefty interest on the two loans because of the nature of the lending product you have accessed. This needs to change to lower your interest expense.
Your first option is to go back to the mainstream banks to buy your outstanding loan balances in both Platinum and Izwe, while concurrently stretching the repayment period of the combined loan to offer you more comfortable monthly installments. Commercial banks will rely on your pay slip and offer a better-priced product with monthly installments collected by the employer to lower the risk of diversion.
You also need to focus on eliminating the reasons leading you to borrow if they are not for investment purposes, otherwise your goals for personal development will remain a pipe dream. Start by streamlining your life and financial goals.
Patrick Wameyo is a financial literacy coach at Financial Academy and Technologies, and an entrepreneurship coach at The Entrepreneurship Center EA. [email protected]