Latest posts by Terry Wangari (see all)
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With improved access to financial services through mobile technology, debt is increasingly becoming a necessary evil. People are finding it easier to access small instant loans through mobile applications such as Branch, Tala, Saida, Haraka and Mshwari just to mention a few.
It is a good thing to have a hustle free loan right from on phone, after all, no one knows that you have borrowed. With the loan, you can boost your appearance as well as afford coffee for friends.
The negative part of instant loans in that they are short term and come with high interest rates. Defaulting may also lead to you being negatively listed with the Credit Bureau meaning you can no longer access a loan from any institution.
But why borrow and get yourself into unnecessary debt pit?
1. Spending More than You Earn
Spending more than you earn is easier than you think. You may even be doing it right now without realizing it. Dipping into savings, borrowing from others, and using credit are a few ways you spend more money than you bring in.
You can get away with overspending for a few weeks or months, but sooner or later, your hole-digging spending habits will catch up with you. Soon, you will deplete your savings, max out your credit cards, and run out of places to borrow money.
Solution: Reduce your spending by keeping it within your monthly earnings use the extra money to pay down your debt. Create a budget for your income.
2. Spending Money That You Don’t Have
This is the ultimate lesson in financial literacy. Not only are you spending more than you are earning but you also start spending money you are yet to earn or money that you do not have. This happens by acquiring credit cards, taking out small loans – overdrawing your bank account or cash advances. While these seem like small cash that you can easily repay, before you know it, you have already started creating debt. So if you do not settle these small loans before the end of each month, the debt will continue to grow.
Solution: This bad habit can only be curbed by sticking to your income and reducing your unnecessary expenses. Use only your income to pay for your wants and needs
3. Using credit for Ordinary Purchases
Choosing credit over cash to make ordinary purchases when you have the cash is another bad habit that accumulates debt. You might want to get the goods (or services) without having to pay for them, but the convenience of holding on to the money in your wallet comes at a cost. Chances are that if you do not want to pay for it today, you are not going to want to pay for it tomorrow.
Solution: Use the money you have already earned. Be mindful that, while you would want to postpone payment by using credit, you will end up paying more at the end of the month than when you should have just spent the cash to begin with.
4. Re-Cycling Debt
The thing with buying goods on credit, it may reach the end of the month and the money to pay off the credit cannot be found. So, you would be tempted to purchase credit to pay off the existing credit you have. When that happens, you are not decreasing your debt in any way. You are simply moving around your debt whilst acquiring more. Not to mention balance transfers have transaction fees, some loans have a down payment or origination fee that adds on the existing debt.
Using debt to “pay off” debt might be beneficial if you can transfer a balance from a high interest rate credit card to one with a lower limit. However, you have to be careful that the balance transfer fee does not negate the interest savings and that your post-promotional interest rate is not worse than your previous rate. Transferring a balance once or twice to take advantage of a great rate is different from continually transferring balances to dodge credit card payments.
5. Keeping Up with Appearances
This is a disease that will be the end of the middle class in Kenya. I have been a victim of this in one form or another. The fear of missing out or being excluded has put a lot of people in great financial strain. You start going to restaurants you cannot afford, purchase car loans that you cannot sustain and spending money in products or services that you otherwise did not need just to impress people. This ‘fake it till you make it’ attitude puts Kenyans in so much debt; some have actually declared themselves bankrupt.
Solution: Let go of having the need for material things. If you cannot afford something, right now, do not buy it. Besides, if you must be like everyone else, cultivate your own lifestyle.