It's 2021, and the country and its people are choking with debts. On a national level, the national debt is now over Sh7 trillion, while on an individual level, we are raking in debts in the billions. In 2020, Kenyans borrowed nearly Sh1.18 billion every day on Fuliza and M-Shwari. Also, loans worth Sh1.63 trillion had been restructured by banks at the end of December 2020. The majority of these loans are personal and household loans, proof that millions of us are stuck in debt.
How then can you manage your loans and even pay them off faster?
Bad debt versus Good debt
There is debt that can improve your net worth, and debt that can leave you worse off. Edwin Okumu, a former credit manager who now works as a financial and tax consultant says that good debt is the kind that will help you generate more income or build up your net worth. "Loans taken to buy furniture or fund a lifestyle are bad debts. Furniture may look good but it will never appreciate," he says. Start by identifying the kind of debt you have.
If you have bad debt, pay it off first. "Once the bad debts are settled, you will free up more money that can now go to offsetting your pending good debts," he says. According to Pam Mutembei, a former career banker, financial consultant, and the founder of This Girl Boss Hustle Kenya , bad debts are very expensive and should be paid off first. "Mobile loans and credit cards may seem affordable on face value, but they are some of the most expensive debts due to high interests," says Pam.
You want a lot more of your money to go into settling your debts, so you must reconfigure your lifestyle. Last year, popular lawyer Harun Ndubi hit the headline after it emerged that he was facing auctioneers after failing to pay rent. In July, he moved to court seeking orders to stop his landlord from evicting him and auctioning his property to recover rent money. He started defaulting on rent in April and owed Sh414,000. This amount is equal to Sh103,500 rent per month. Instead of accumulating such debt, it would have seemed wiser for Mr. Ndubi to move to a more affordable and decent house that costs Sh25,000.
Pam says this is the principle that should apply when readjusting your lifestyle. "Beware of the amount that goes into paying your rent. Is it extravagant? Can you move to a different house in a different residential area that is more affordable?" she says.
Scaling down will ease your money pressure and keep your credit score healthy by ensuring your repayments are regular and up to date.
For Paul Mugenda, renting out his three-bedroom house in Imara Daima, Embakasi, Nairobi has given him an extra Sh50,000 monthly which he is using for his loan repayments. "I was laid off in April 2019. I had a debt of Sh2 million with monthly repayments of about Sh53,000. I had paid off two years and still had two years to go."
In the initial years of your loan, more of the funds you pay may be directed towards servicing your interest. Pam says that you can get clever about your loan by accelerating payments on the actual amount you borrowed known as the principal. If you borrowed Sh1 million for three years on reducing balance, suggest to your bank that you want to accelerate your repayments such that you can offset the loan within two years.
"Indicate in writing that you will be adding an extra Sh20,000 in your monthly repayments. This extra money should strictly go to reducing your principal amount," says Pam. By settling your debt earlier, you will be saving money you'd have used to pay off on interest. For example, if your monthly total debt repayment is Sh30,000, you will save Sh360,000 by paying off a year earlier. You can also use the round-off method to increase your repayments. For example, if you pay Sh26,000 per month, round the figure to Sh30,000. The extra Sh4,000 will be nearly two months of extra payment within a year.
Seal all the loopholes in your monthly spending. "Debt management is all about money flow. There is so much money that you could save from your daily and monthly budgets to avoid getting overly stretched by your debt obligations," Pam says. Trim your budget as much as possible. "How much do you spend on food every day? Sh200 per day? This amount may seem negligible but in a month, it amounts to Sh4,000 you could save by carrying lunch to the office," says Pam.
According to Pam, restructuring your personal loans does not mean going for a moratorium at the bank. It means consolidating your payments so that you don't have money getting deducted all over. "The plan is to have an efficient payment plan by consolidating your income and automating your debt repayment," she says. Consolidating payment is often mistaken with consolidating debt. Whereas your lender can consolidate all your debt, you must be cautious on the terms, rates, and the actual total cost of credit. "Debt consolidation is not the same thing as debt elimination. You may get extended repayment terms but this means that you will be in debt longer, especially if the interest rate isn't lower than what you were paying for the consolidated loans before," says Okumu. He also cautions that while you can get an introductory low-interest rate, there is no guarantee that it will not be reversed upwards, further trapping you in extended repayments.
