Steps to help you wriggle out of that debt hole

You are in debt and you don’t know what to do. You have taken loans from the sacco, topped them up, broken the “Two Third’s” rule, borrowed from your chama, your friends... the list is endless. Simply, debt is wound up all around you like a snake and you can hardly breath.

Marcos Karanja*, a civil servant, was in such a predicament. He had many loans from his sacco, commercial banks and myriad chamas.

When matters reached a critical point, he would wriggle out with top-ups of the biggest loans and use the net to settle a few instalments on the other existing loans.

But unknown to him, every top-up deal would raise his loan amount with that particular financial institution and retain him as their customer for much longer.

Sometimes, Mr Karanja would default on some of the smaller chama loans and their penalties would accumulate to huge sums. He would turn to his friends to bail him out but soon these people began avoiding him.

Matters reached a crisis point when officials from one of the chamas teamed up, shared his information with others and raided his home to recover their debts.

They carried away most of his disposable property, which only partially settled his outstanding loans. This was a wake up call for Mr Karanja to finally accept that he was in debt. He consulted financial advisers who gave him a plan, at a fee.

The “Two Thirds” lending rule, which is in operation in all formal financial institutions, ensures that salaried people don’t go Mr Karanja’s way.
It bars lenders from deducting more than two thirds from a person’s net monthly salary as loan repayment instalments.

However, crafty people routinely go around this rule by becoming members of informal lending institutions like chamas where full disclosure of one’s finances is often not required.

Many people also fall into the trap of paying only the minimum instalments required to service their loans, even when they have the ability to pay extra money from salary increments and other sources.

Financial experts warn that these minimum payments are designed to keep borrowers paying the high interest rate of the loan, even if the base lending rates falls midstream, for the loan’s entire lifespan.

However, with a plan, you can ride above your debt in the New Year. Mr Anderson Kalu, a banker, says financial institutions have no problems with borrowers repaying faster than the agreed amount in the loan contract.

“As one debt is paid off, some borrowers realise more disposable money, and since they are used to living with less, they commit the extra cash towards another debt”, he says.

This kind of effort often improves one’s overall credit scoring. For those who have collected debts from all over and are unable to pay, Mr Kalu advises them to stop getting further into debt. “If you have credit cards, cut them up or put them where you cannot easily get them,” he suggests.

He warns people whose lifestyles depend on credit to be wary of digging a hole from which they cannot easily climb out. “To get out of debt, stop spending more than you make each month and don’t ever count on future bonuses, inheritances, refunds or other non-dependable income to bail you out,” he says.

Mr John Kung’u, a certified public accountant, says the way out of debt starts by determining how much one can afford to pay each month toward his or her debts. “One may need to examine his or her spending for the last several months to get a clue of what could be going on,” he says.

Mr Kung’u suggests finding out things one can eliminate or do without for a while to consolidate their debt repayment power. “You can postpone some purchases, cancel subscriptions to members’ clubs, pay television, magazines and so on; anything to free up more money to pay off your debts,” he says.

Mr Kungu advises people to negotiate with their creditors for more time to repay their loans. “But even as you do so, have something on the table that you take to settle your debt”, he says.

After keeping the debt collectors and auctioneers at bay, keep track of your total debt by writing down each monthly instalment you are paying.

Create a score card and record the creditor’s name, the current balance and the interest rate, then take a separate sheet of paper and record the debts, starting with the one that has the highest interest rate.

Strive to meet the minimum monthly payment for each loan and record this on your score card. After all your monthly overheads have been paid, take any extra money left and make another payment on the debt with the highest interest rate.

You can make this additional payment on the current month or save to add to next month’s bill.