• Loans may be easy to get but repaying them is another story altogether
Image: STAR ILLUSTRATED
Lots of people find themselves in a spiral of endless debt after taking loans they thought would put them on the path to riches. The debt is owed to micro-finance institutions, banks and informal sources, such as shylocks and savings groups.
If you borrow money to pay previous debts, you are effectively in a debt spiral. Without an increase in your income or a change in spending habits, you will remain in that cycle of borrowing and repaying.
Jane Mnene, a middle-aged widow and single mother, borrowed Sh45,000 from a micro-credit institution to boost her food-vending business. Little did she know the loan would increase her troubles. She committed herself to paying Sh6,500 every week until the loan was cleared.
“I often have to get money from other sources because it is very hard to get Sh6,500 every week from this business,” Mnene says.
The other sources include her local savings group (chama), friends and relatives. She's also had to take short-term loans from other micro-credit institutions just to keep up with the weekly payments, but she's late paying those loans, too. It's a classic debt trap.
Jack Jumwa, a retiree, sneaked out of his town house to his childhood village after defaulting on a loan he took to start raising broiler chicken. The micro-credit company that lent him the money was daily sending agents to his house, demanding payment.
“I told the company the troubles I had with the chicken venture but they did not want to understand,” Jumwa says. “I had no money; what could I do?”
Loans are not entirely bad. If well utilised, micro-credit can help a business grow or survive a temporary dip in revenue. Small loans are very helpful in recovering from emergencies such as fire, floods or theft. Borrowers should keep in mind several factors as they take advantage of micro-credit facilities.
1. What is the purpose of the loan? Don't borrow merely because a loan product has been made available. All loans attract interest and other fees. If you have access to money that is not a loan (such as grants), you are better off taking that option.
2. Terms and conditions: People get so excited whenever their loan application is approved that they fail to read the fine print. Understand how much you are expected to repay, length of the repayment period, any late payment fees and what happens in case you default. Do not take a loan if you don’t have a reliable income.
3. Don't take more than you need: A bigger loan will be more difficult for you to repay. Some micro-credit firms encourage borrowers to take more money while they still have pending loans. Such "top-ups" are tempting, but they come with very high fees. Borrow only for purposes of investing in a business.
4. Pay on time: This not only improves your reputation in the eyes of the lender; it will help you avoid late payment fees. Remember that lenders make more money from you the longer you delay payments.