Up to your ears in debt? Here’s how to free yourself

Kilimanjaro and Co Auctioneers take away property from Trident Insurance Co. Limited which was auctioned following a court order after the insurance company failed to pay Transeast Limited over Sh2.7 million. [Kelvin Karani,Standard]

Good health, being debt-free and having a clear conscience.

These are some of the things that epitomise true happiness, according to one sage. 

Today, falling into a debt trap is just a click away on your phone. However, unshackling yourself from the debt snare can be an interminably depressing affair.

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

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

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

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

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

He said Kenya is witnessing a crisis largely fuelled by unregulated digital lending platforms. 

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

According to the governor, household loans advanced by the banking sector stood at Sh843.5 billion at the end of December last year, out of which Sh70.1 billion was classified as non-performing. 

Conventional advice tells us that when in a hole, one should stop digging. But how does one climb out of a seemingly intractable debt hole?  

And are the experts ignoring the structural economic reasons - the high cost of living, unreasonably high cost of healthcare and education in the country - that have sunk many Kenyans into debt? 

Money Maker explores

George Kamau, a senior portfolio manager at ICEA Lion Asset Management (ILAM), underscores 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 per cent of one’s income, is a good starting point.

Prioritise spending

One should also prioritise their spending areas besides having an emergency fund.

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

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

“One needs to set up structures that will enable them to roll with the punches without having to resort to unhealthy debt,” he said.

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

He cited knowing one’s income streams, tracking of spending, setting goals and making a financial plan as some of the steps towards financial independence.

Others are reduction or elimination of debt and building an emergency fund.

Kamau, however, pointed out that reducing one’s debt should not be a goal but a side effect of habit change.

“Before you can reduce your debt, you must be profitable as an individual. You become profitable by restructuring your life so that you spend less than you earn,” he said, adding that one of the low-hanging fruits is reducing one’s expenses.

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

Kamau explained that debt repayment guarantees one a rate of return.

“If you owe me Sh100 and I charge you 10 per cent interest, every time you make a payment there’s an interest component,” he said.

“The moment that you clear the debt, the Sh10 you were paying out as interest belongs to you now and you can invest it.

“As long as you are paying debt, there’s a cost to it. The more debt you have, the more bills you have.”

Cash is king, and paying off your debts ensures steady cash flows, added the financial advisor.

“When you eliminate a debt, the money that you used to pay that debt now becomes available to you to purchase other goods. You can now start buying what you want,” he said.

Being debt-free also gives one freedom and peace of mind, whose benefits lead to overall wellness.

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

“Once you’re debt-free you can sleep easier at night. You’ll put less pressure on yourself, and you’ll have fewer fights about money with your partner.” 

Kamau warned against resorting to more debt, no matter how tough things may get at times. 

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

He explained that using channels such as credit cards draws one into a debt crisis. He added that one should also avoid avoidable recurrent expenditure and only spend on basic needs.

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

A popular strategy for getting out of the debt trap is the “snowball” method. This is where one lists their debts from the smallest to the largest, the interest rates notwithstanding, and starts repaying them.

However, Kamau advised that one can also order their debts and pay off the most expensive as a strategy to reducing interest repayments. 

“Human beings are complex psychological creatures and require positive reinforcement. You could 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 we choose what makes us happy in the short-term. Choose the method that makes you happy but either way, get started.”

?Jijenge Credit Chief Executive Peter Macharia, who founded the thriving microlender seven years ago, said getting into debt is one of the easiest things nowadays.  

“It’s very easy, especially if it’s not planned or the borrower hasn’t researched on pricing, or has no passion for the work they have taken the debt for,” he said.

He advised that if one finds themselves 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 friendly interest rate and negotiate a long-term repayment plan.

Borrowers can also approach lenders to restructure the loans.

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

One should further seek to increase their income streams and avoid borrowing to fund their lifestyle.

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

“Debt is not a sin, but one should just be alive to the fact that they must pay,” said Mr Macharia, while urging people to live within their means.

He further observed that the pandemic had pushed many to betting, online forex and crypto-currency trading, which means they have to borrow to sustain these habits. 

ILAM General Manager for Business Development and Client Service Elizabeth Irungu advised borrowers to seek clarity on interest rates before taking up a loan.  

Computing one’s interest makes them alive to the high costs of racking up more debt.

She urged people to reduce spending and shun “unearned money”.

“A credit card should be used only when there’s an emergency and not when a child cries for KFC,” said Ms Irungu.

Digital lenders

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

Irungu reckons they are to blame for the current crisis but advised that one should have the “fortitude of mind to avoid those loan traps.”

“This is a new way of trapping people into debt. It doesn’t discriminate or care if you are young or old. As long as you have the app, it prompts you to take a loan,” she said.

Macharia, concurred, saying the apps could be helpful but also destructive.

“Traditional lenders are more sober, and borrowers have to provide concrete details. The loan approval is more scientific as opposed to the rest,” he said.

CBK has recently stepped up plans to bring digital lenders under its regulation as one way of taming predatory lending. 

“We have more than 100 unregulated digital lenders and about 8.3 per cent of the household population in the country use the credit channels,” said Dr Njoroge.

“There is a bit of chaos in the borrowing and lending patterns, where people will probably go to three or four lenders, borrowing from one to repay another, and when they get into trouble, the whole process collapses.” 

On gaining financial resilience, Irungu said fixing and pre-empting debt is a must to tame reckless borrowing, especially when it comes to guaranteeing colleagues Sacco loans.

“If it’s a consumption loan, I’d say be a bit selfish and turn them down because when they default and you are a guarantor, you could lose your hard-earned savings,” she said.

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

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