6 Things You Need To Know

Starting your own business, making a quick shilling, covering daily expenses, purchasing that house or apartment, paying that fee...if any such related thought has ever crossed your mind, then the thought of borrowing money has not lingered too far from that. Most of us hate the idea of borrowing funds due to pride or whatever it is we stroke our egos with. Using your own money in pursuit of anything is as lamentable as it is commendable. What we’ve been excessively exposed to is “normal” bank loans and the occasional family fund raising. There’s more to borrowing money than meets the eye. Here are a few pointers I thought I’d share with you.

1.      Read the fine print – Everything comes with terms and conditions of use. YOU are the borrower. Take your time to read the fine print until you’ve understood the policies. Be sure to ask about penalties charged for late and early repayments. Most institutions will charge you extra for not meeting the repayment deadline by midnight of the contracted day(s) of repayment. An even higher rate will be charged if you pay back the whole debt at once. This is because they have to forfeit the interest they’d be earning had you chosen to pay them back over the planned time period. Both of these are negotiable, so please take your time coming to affordable terms. Most importantly, check on the policies regarding defaulting. This occurs when you show inability to repay the money you borrowed. It typically ranges between lenders from 30 – 90 days, or more depending on how sweet your tongue is.

2.      Avoid unsecured loans – The interest charged on these loans is enough to postpone the apocalypse. Would you lend money to someone else without some sort of guarantee of payment? These loans bear amongst the greatest risks for a lender and inevitable duress on the borrower to repay.

3.   Marginal loans –This refers to borrowing from an investment or investor firm for the purpose of investing, amongst other personal uses. It is common practice to provide collateral for the loan in the form of own shares or assets. The rate at which this type of loan has shot up in Kenya is outlandish. Looking back at the IPOs in Kenya since 2005, lots of people have been borrowing under a ruse that they’ll make a profit from trading within the 1^st week…..and people never learn from their mistakes. This type of loan is a pure gamble.

4.     Search for the best rates – From borrowing from your roommate at an interest of 10% to that of the bank at 25%, there’s a tariff that will suit your specific needs. Rates are not confined to monetary compensation. Some charge you a percentage of your products or time. You might find it better setting aside a crate or two of beer every month from your brewery than repaying money that would have otherwise been plowed back in to your venture.

5.    Borrow money - DO NOT put all your eggs in one basket. Borrowing money lessens the risk you expose your personal finances to. It spreads the risk of loss. Example; You use your personal savings of Kshs.10,000 to start a small bakery that incurs losses amounting to Kshs.3000 every month. I borrow Kshs 5000 to start a similar bakery and incur the same losses. Who would be in a better position? You, who's survival hinges on every cent as you try recover your money, or me who has an extra Kshs.5000 to invest, improve returns and repay loan?

6.  DON'T borrow in a foreign currency - Lots of manufacturers and banks do this. They say that the foreign currency is more stable thus creating some sort of certainty in reimbursement amounts. This to me, is male-cow-manure!! How exactly is it sensible to peg your loan to a foreign currency amidst a depreciating currency with which you make your income? Whoever borrowed $ 1M last year is automatically facing higher settlement amounts, excluding increased interest rates. Did I mention how the effects of the recession are still being felt in Africa? Of all the continents, we usually feel the effects last be it technological advancement (save a limited no. of innovations), climate change or any other thing. Same applies to the recovery from the recession. We're not yet able to let go of the money in our pockets, even when purchasing staple foods.

There's lots to look out for, but that shall be covered at another date. Borrowing money is something all of us have done and as much as we hate it, is a viable source of funding. Conduct deeper research before you do. Borrow this information and advance on it if you will.

Armed for the future

There's many ways to arm your future. One can literally make a futures contract to have ammunition delivered at a future date a a given current price (the beauty of futures market). This isn't the kind of arming I'm talking about though. I'm referring to increasing the probability of a secure and more stable future. Investing to be more specific. Many of us are investing subconsciously e.g. eating right, networking, purchasing shares,etcetera. I'll briefly focus on the financial investment bit in hopes of alerting or reminding you how important it is to think in the long-term.

 

I've been setting aside Kshs. 600 every week for the past month. It sounds petty right about now, but I'm sure this "petty" stamp will decrease exponentially to the function of time. I plan on owning/acquiring at least 1000 shares in a number of companies listed in the NSE by the time I graduate next year. Economics101 teaches us that the opportunity cost of having money set aside is the interest one would have alternatively earned. Last i checked, the interest rate offered by most banks floats around the 4% mark while that of inflation around the 20% zone. Without getting too statistical about the figures, one can safely say that my recent more sounds good. As an OPM member, I need to grow my income...somehow! So i picked one of the safer ways of doing it, buying shares. Anyone who kept their eyes on BAT around 7-10 years ago would have noticed their Kshs. 139 stock price. As with most, people kept away from it claiming it was too expensive a share. As far as I recall, the company has been paying dividends in the range of Kshs.14 - Kshs. 17.50 @ share....among the highest paid in this country. The stock is currently listed at Kshs. 255 per share, a decrease from the Kshs. 300 it hit some time last year. There are other examples in the opposite end of this spectrum. I'm certainly not advising you on what to do with your money. My plan is to keep setting aside this "extra"amount every week. What I'm asking you to do is to consider saving Kshs. 601, and pray I don't catch up to your wealth.