In debt to the ears? Here’s how to break free

Good health, debt free, and a good conscience.

These are some of the things that embody true happiness, according to a sage.

Today, falling into the debt trap is just a click away on your phone. However, breaking free from the debt trap can be an endlessly depressing affair.

Kukopa harusi, kulipa matanga, say the Swahili. Freely translated, borrowing is easy but reimbursable, not so much.

The influx of digital lenders into the country has been blamed for creating a debt-ridden generation that borrows for consumption.

The Covid-19 pandemic, which put more than 700,000 Kenyans out of work last year, has only worsened the personal debt crisis.

In other words, Kenyans borrow from Peter to pay Paul, enslaving themselves in a cycle of nasty debt.

Central Bank of Kenya (CBK) Governor Patrick Njoroge recently warned that household debt has reached unsustainable levels, made worse by the economic effects of the Covid-19 pandemic.

He said Kenya is experiencing a crisis fueled largely by unregulated digital lending platforms.

“We are concerned that there is a build-up of debt in the private sector,” he said.

According to the governor, loans to households advanced by the banking sector stood at 843.5 billion shillings at the end of December last year, of which 70.1 billion shillings were classified as non-performing.

Conventional advice tells us that when you’re in a hole, stop digging. But how do you get out of a seemingly insoluble debt hole?

And are experts ignoring the structural economic reasons – the high cost of living, the unreasonably high cost of health care and education in the country – that have put many Kenyans in debt?

Money Maker explore

George Kamau, senior portfolio manager at ICEA Lion Asset Management (ILAM), emphasizes that people should strive to build financial resilience as a buffer against unhealthy debt.

He says having a budget and sticking to it, as well as saving at least 10 percent of your income, is a good place to start.

Prioritize spending

It is also necessary to prioritize their areas of expenditure in addition to having an emergency fund.

This should be at least six months of running expenses to cover illness or loss of a job.

Mr Kamau says unprecedented problems such as the current coronavirus pandemic or terrorism can also contribute to unforeseen financial difficulties.

“We need to put in place structures that will allow them to roll with their fists without having to resort to unhealthy debts,” he said.

Kamau spoke during an ongoing series called Personal Finance Masterclass by ICEA Lion that seeks to help individuals achieve financial independence.

He cited knowing your sources of income, tracking expenses, setting goals and developing a financial plan as steps to financial independence.

Others are reducing or eliminating debt and building an emergency fund.

Kamau, however, stressed that reducing his debt should not be a goal but a side effect of changing the habit.

“Before you can reduce your debt, you have to be profitable as an individual. You become profitable by restructuring your life so that you spend less than what you earn, ”he said, adding that one of the fruits at hand is cutting expenses.

“When you become profitable, that extra income is what you use to pay off your debts. ”

Kamau explained that paying down the debt guarantees a rate of return.

“If you owe me 100 shillings and I charge you 10% interest, every time you make a payment there is an interest component,” he said.

“By the time you write off the debt, the Sh10 you were paying in interest is now yours and you can invest it.

“As long as you pay off debt, it comes at a cost. The more debt you have, the more bills you have.

Cash is king, and paying off your debts ensures stable cash flow, the financial adviser added.

“When you eliminate a debt, the money you used to pay off that debt now becomes available for you to buy other goods. Now you can start buying whatever you want, ”he said.

Being debt free also gives freedom and peace of mind, the benefits of which lead to general well-being.

“If you don’t owe an employer or a lender money, that’s freedom. You can even quit your job or take risks, but if you have debts you are tied up, ”he observed.

“Once you are no longer in debt, you can sleep more easily at night. You’ll put less pressure on yourself and have fewer arguments about money with your partner.

Kamau cautioned against resorting to more debt no matter how difficult things can get at times.

“It can be difficult at first, but honestly you don’t need to. Yesterday, before you took out that loan, you were surviving… you were alive even before the mobile loans, ”Kamau said.

He explained that using channels such as credit cards leads to a debt crisis. He added that it was also necessary to avoid avoidable recurrent expenses and spend only on basic needs.

“Once you’ve stopped acquiring new debt, look at the remaining (burden) and how are you going to deal with it,” Kamau said.

A popular strategy for getting out of the debt trap is the “snowball” method. This is where you list your debts from smallest to largest, interest rates notwithstanding, and start paying them off.

However, Kamau indicated that one can also order his debts and pay off the most expensive ones as a strategy to reduce interest payments.

“Human beings are complex psychological creatures and require positive reinforcement. You can also start with the loan with the lowest balance or the one that bothers you the most, ”he said.

“We rarely make decisions based on optimal paths, more often than not we choose what makes us happy in the short term. Choose the method that makes you happy, but in any case, go for it.

“Jijenge Credit Managing Director Peter Macharia, who founded the successful micro-lender seven years ago, said getting into debt is one of the easiest things these days.

“It is very easy, especially if it is not planned or if the borrower has not researched the prices, or has no passion for the work for which he has contracted the debt,” said he declared.

He advised that if one finds himself indebted to many lenders, they should try to consolidate the loans in one financial institution.

One can, for example, go to their Sacco which has a favorable interest rate and negotiate a long-term repayment plan.

Borrowers can also approach lenders to restructure loans.

But there are also personal habits that need to change, such as cutting back on unnecessary spending.

One should also seek to increase their sources of income and avoid borrowing to finance their way of life.

As Western influence continues to permeate society through social media, materialism has taken hold among many Kenyans. Some lenders have even offered “weekend loans”.

“Debt is not a sin, but you just have to be aware of the fact that they have to pay,” Macharia said, while urging people to live within their means.

He further observed that the pandemic has caused many people to turn to betting, online forex, and cryptocurrency trading, which means they have to borrow to maintain these habits.

ILAM’s Managing Director for Business Development and Customer Service, Elizabeth Irungu, has advised borrowers to seek clarification on interest rates before taking out a loan.

Calculating their interest makes them aware of the high costs of accumulating additional debt.

She urged people to cut spending and avoid “unearned money”.

“A credit card should only be used in an emergency and not when a child is crying for KFC,” Ms. Irungu said.

Digital lenders

But are digital loan apps putting Kenyans in a debt trap?

Irungu believes they are to blame for the current crisis, but advised that one must have “the courage of mind to avoid these loan traps”.

“It’s a new way to trap people in debt. He doesn’t discriminate or care if you are young or old. As long as you have the app, it prompts you to take out a loan, ”she said.

Macharia, okay, saying apps could be useful but also destructive.

“Traditional lenders are more sober and borrowers must provide concrete details. The approval of the loan is more scientific than the others, ”he said.

The CBK recently stepped up plans to bring digital lenders into regulation as a way to tame predatory lending.

“We have over 100 unregulated digital lenders and around 8.3% of the nation’s household population use credit channels,” Dr Njoroge said.

“There’s a bit of chaos in the borrowing and lending patterns, where people are probably going to go to three or four lenders, borrowing from one to pay off another, and when they’re in trouble, everything the process collapses. ”

To gain financial resilience, Irungu said debt repair and pre-emption is key to taming reckless borrowing, especially when it comes to securing Sacco loans to colleagues.

“If it is a consumer loan, I would say be a little selfish and refuse it because when they default and you are a guarantor, you could lose your hard-earned savings,” a- she declared.

Being listed with credit bureaus when you default on a loan also hurts your credit score in the future, she warned.

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