Money Talks: Why you should pay off debt early

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Do not take on more debt to finance your current debt.

What you need to know:

  • This decision to take on debt isn’t a light one.
  • The responsibility of debt can weigh down heavily on anyone’s shoulders.
  • No matter if it’s good debt or bad debt, it has a cost attached to it.

At some point in your financial timeline, you may find yourself with a project you are unable to finance fully or partially.  

You will hunt for a lender to give you the money for this project. 

This lender could be your bank or Sacco, a mobile lending app or an independent investor, your Chama or investment club. Maybe a friend, or a family member. 

You will approach them, present your case in a box wrapped in humility and schmooze, and they will lend you the money. You agree on how long you will have the money for, how much you will repay in interest and principal, and how frequently you will make the repayments. 

It’s all good. 

Not a light decision 

This decision to take on debt isn’t a light one. The responsibility of debt can weigh down heavily on anyone’s shoulders. No matter if it’s good debt or bad debt, it has a cost attached to it.

First, there is the financial cost. This is from the interest you have to pay your lender while you service the loan. 

As a borrower, you should meet this financial cost as per the repayment schedule. It could be monthly, quarterly or any other regular period – it all depends on the contract you entered with your lender. 

I have never heard of a loan that is extended at no interest. If it were, then it wouldn’t be termed as a loan, it would be a gift. A gift in cash.

There is also an emotional cost that comes with debt. You will get a positive emotional response when you have the money at hand to repay your debts on time and in their entirety. Say, you are servicing a bank loan that requires you to pay off Sh10,000 by the 12th of every month. 

You will feel like a champion if the full amount is in your account before this due date.

If for whichever reason, you are unable to have this money, you will grow anxious as the due date approaches. 

Ugly bones

You will be anxious and stressed, shameful that you cannot meet your obligations, doubtful of your capability as an earner, mistrust of the general economy, casting a furtive glance at your front door as you wait for that inevitable knock from the auctioneers, or for that phone call from your lender asking you: What’s happening?

It is a whole bag of ugly bones, dear reader. Ugly. 

The emotions run deeper when you default on your loan. And how these things go is that if you default this month, there is a high likelihood you will default the second month. And the third month. 

And by this time, defaulting will be the norm rather than the exception. You will feel as though you are being buried in a grave you dug yourself.

Pretty soon, your loan repayments will have snowballed out of control and your debt becomes unmanageable. 

So yes, there is a case for clearing your debt earlier than you need to.

You save yourself the ugliness of these negative emotions. 

You also save money – the interest you would have paid in the months and years ahead goes back into your pocket. 

When to consider clearing your debt

Consider clearing your debt early if:

1. You have already saved six months’ worth of monthly living expenses to your emergency fund. (Actual expenditure, not budgeted expenditure). 

The way the economic climate keeps shifting because of Covid-19, though, I propose you have nine to 12 months’ worth of expenses in your emergency fund.

2. A cash lump sum has landed in your lap. Say, you have received an annual bonus from your employer or your business has had an unusually good season. Maybe you won a lottery or you got an inheritance.

Direct this windfall to clear as much debt as you can.

3. Your lender is revising his interest rates upwards, which translates to a ballooned repayment on interest. The revision means that the total repayment on your loan will be more than what you can afford with your current income. 

Rearrange your budget to cut your expenditure, and redirect that money to clearing some debt.

4. You have, in the past, found yourself in a position where you were unable to settle your debts, and you could not handle the negative emotions that followed. That stress crippled you to the point where you were unable to function in other areas of your life normally. 

If this ball of debt drops and several others drop with it, then consider an early repayment.

5. Your income is threatened and you cannot see a way out of this conundrum in the foreseeable future. As a last resort, consider disposing of some of your assets now to get the money to clear as much debt as you can. 

Do not take on more debt to finance your current debt.

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