In Kenya, today, taking a loan is relatively easy. You can take a loan from licensed digital lenders, banks, shy rocks, and unlicensed lenders among other institutions offering loans. Coupled with a society that believes in you live only once (YOLO) and the fear of missing out (FOMO) most people end up having multiple loans.
How can you manage multiple loans and get out of the debt trap? It’s important to learn how to manage your income so can be able to cater to your needs, wants and repay your debts. In so doing you avoid the risk of defaulting and ruining your credit rating.
In this article, we look at smart ways of managing multiple loans. It’s important to budget your money and keep track of all your spending. If implemented right, you can save money and pay your debts on time. We look at how to manage multiple loans and effective debt management strategies you can implement to achieve a debt-free status.
What is debt management?
Debt management refers to planning on how to repay your loans and ensuring you have manageable debts. It involves budgeting one’s income to ensure you pay your debts on time without compromising your lifestyle. You will need to have a strategy to ensure your income covers the debts, needs, and wants without having a cash deficit.
It’s the ability to manage multiple loans without defaulting. However, if you find yourself in a debt trap you will need a strategy. The goal is to gradually decrease one’s total debt until one is finally debt free. To clear your debts must have a plan on how you allocate your income to the different expenses and debts.
Tips on how to manage multiple loans
A budget is a plan on how you intend to spend your money. Create your budget and break it down into expenses, savings and debts. Strictly adhere to the set budget and eventually, you will be able to start saving money.
Here is a sample budget template you can use to create a budget. The expense breakdown will vary from one person to the other.
Make a list of all the debts you owe.
The next step is to make a list of your debtors in order from the highest to the lowest. This will help you know how much you owe. After listing all the debts, you can add a column on how much interest and penalties you are accruing. This will give you a clear picture of the most expensive debts. Here is a debt template you can use to list all the loans you owe.
You can then apply either of the two recommended methods to be able to clear off your debts.
These methods are:
- Debt snowball
This essentially means paying off your small debts first and then working up to bigger ones. It is good for motivation as your debts reduce.
- Debt avalanche
This means paying off debts with the highest percentage of interest accrued and then working your way down. It helps in managing debts with high accruing interest rates. It also helps one save money that would have been paid as interest if one had used the snowball method.
Consolidate your debts
Debt consolidation involves taking one loan to clear all other debts. Consolidation of debt minimizes the chance of missing any monthly repayments, helps improve your credit rating, and gives you a longer loan repayment tenure. Plans such as the KCB debt consolidation will help you manage multiple loans, and you can pay off your debts comfortably.
Repay debts promptly
You can avoid being listed on the CRB if you make timely payments. It also prevents the debt from gradually increasing because of additional fees and accrued interest rates.
Get a calendar and add a notification on when each loan is due. Make sure you don’t miss any repayment. If you are unable to pay because of unforeseeable circumstances, you can make partial payments to avoid being listed on the CRB.
Recognize that you need assistance
If your debts get out of control, you can ask your employer for a salary advance. They can deduct your monthly repayment from your salary before you get paid. This minimizes the chances of accruing additional interest and penalties.
You can also talk to a financial advisor who will walk with you and guide you on how to manage your debts. They will advise you on which debts to pay first and how to negotiate for more time to make the payments.
Make the bare minimum payment
Making payments can be difficult at times, especially when other bills still need to be paid. However, it is important to pay the required minimum payment. This ensures that your loan does not default, and no additional penalties are applied to your existing loans.
How to become debt free in the shortest time
Look for a side hustle
An extra income will come in handy in helping you repay your debts. If you have any free time, consider taking up an income-generating activity. Allocate the extra money you earn to debt repayment. There are online side hustles such as online freelancing that will help you make an extra income. Examples of side hustles you can do in your spare time include the following
- Affiliate marketing
- Event planning
Reduce your discretionary spending.
Undoubtedly, you will be tempted to spend money on frivolous items such as a new dress, new shoes, going out for drinks with friends, and so on. As much as these things are important in your social life, it is important to put them on hold first.
It doesn’t mean that the hold is indefinite, just until you can get a hold on your debt situation.
Create an emergency fund
Once your debt situation improves, start building an emergency fund. This is essentially money set aside to deal with unexpected expenses. It helps to create a temporary solution in times of emergencies instead of using credit cards or borrowing loans that have higher interest rates. This prevents one from getting into debt.
To start an emergency fund, first, create a budget. You can use the 50-30-20 rule to start your saving journey. Ideally, an emergency fund should be 6 times your monthly expenses. This means you have a buffer of six months in case something happens to your income. Use our 50-30-20 rule calculator to see how you should allocate your income.
The best way to stay debt free is to ensure your money works for you. Invest your emergency funds in low-risk, high-liquidity funds. You can also explore different savings accounts and pick the savings account with the highest interest per annum. Money market funds are the best options for novice investors as they have high liquidity, low risk, and an interest of 8% to 11% p.a depending on the terms of the fund.
There is no one-size-fits-all answer when it comes to managing multiple loans, but there are some smart ways to go about it. By consolidating your loans, automating your payments, and staying disciplined with your spending, you can get out of the debt trap and save yourself a lot of money in the long run.
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