As Kenyans gear up for the festive season, an uptick in borrowing is expected. Whether for holiday plans, bridging income shortfalls or for January’s heavy obligations, options are seemingly endless. Digital lending apps are just a screen tap away, easy logbook loans are on advertisement, while credit card providers are encouraging spending through discounts and extra reward points.
But no matter the reason for borrowing, it should be remembered that it is a contractual obligation with consequences when defaults occur. Any decision should, therefore, be well thought through to avoid financial ruin.
Differentiate between borrowing for critical needs or income shortfalls (must have), versus borrowing for wants or comforts (nice to have). While the holiday season mood can make comforts seem like needs, it is best to budget for such items rather than to borrow for them. Where borrowing requires collateral, carefully think over the intended spending purpose. Additionally, consider the impact of collateral loss were default to occur. If too great to bear, re-evaluate the decision to borrow.
As spending will not pay for itself, it is good practice to only borrow the amount needed. Adding on buffer amounts for ‘in case this’ or ‘suppose that’ is discouraged, as it increases the amount to be repaid. Cutting back on expenses can also help lower the amount to be borrowed or eliminate it altogether. Having a budget provides useful guidance. Ultimately, the amount borrowed is largely dependent on a financial capacity to repay. Accordingly, keep in mind existing financial commitments before borrowing further.
Suitability of terms and conditions
Read and understand everything that is being agreed to. Pay careful attention to interest rates, and all fees and charges, as they directly affect the overall repayment amount. Additionally, some loans offer very short repayment periods. These factors can make repayment very difficult and contribute to default.
Kenyans struggling under the burden of loans with predatory terms remains a serious problem. Consequently, determine how such borrowings will be managed should circumstances compel acceptance of such terms. Informal sources such as family, friends and chamas often have better and more flexible terms and should be considered where possible.
Where the financial means to repay is unclear or at best non-existent, refrain from borrowing. Being pursued by debt collectors can be a very hostile experience and is an unfriendly way to start the new year. Likewise, having to constantly juggle and borrow from one creditor in order to repay another leaves little to no financial breathing room. This debt trap cycle is dangerous and can be extremely difficult to exit.
Honour borrowing commitments and repay as agreed. The temporary freeze in credit reference bureau blacklisting should not be an excuse to intentionally default on borrowing obligations during or from the festive season. Proactively approach creditors prior to defaulting should a change in finances cause repayment difficulties. This will allow for restructuring options to be explored in good time.
As everyone’s financial needs are different, a ‘one-size-fits-all’ approach does not apply to borrowing. Debt repayment will, however, always mean less money available for other financial needs and goals. May prudent decisions be the hallmark this holiday season.
Angela Mutungi is a career international corporate banker and financial services adviser.