Common mistakes to avoid when borrowing money
Have you ever borrowed money from a bank, friend, family member or colleague? Well, for many of those who had never had any experience with a loan, the Covid-19 drove them to borrow and accumulate debt.
From quick loans offered by digital lenders to traditional borrowing from banks, loans are here to stay, with the effects of these credit facilities affecting almost everyone, directly or indirectly.
However, there are some glaring mistakes people make when borrowing money, but these mistakes can be avoided.
Here are some of these errors listed by kenyans.co.ke and how to avoid them.
An undated photo of part of Nairobi’s central business district.
Borrow for consumption
A common mistake people make when taking out loans is borrowing for consumption. Many only borrow to spend money on unnecessary expenses such as buying fashionable goods, travel, and pleasure.
Whenever you borrow, make sure you have a concrete plan. It is important that you plan ahead before taking out a loan and ask yourself questions such as why you need the loan, how much you need, and how you plan to repay the loan.
Avoid diverting borrowed money for an unintended use and always stick to the original plan.
How much do i need?
Many people fail to do a preliminary analysis of the cost of the project to be undertaken. Establish a procedure for estimating all the costs involved and the benefits to be derived from the investments made by the borrowed funds.
Never borrow money to please your friends. Many people have found themselves borrowing on the basis of social pressure. Live within your means, do not accumulate debts because you want to correspond to a particular status in society.
Don’t borrow blindly
Seek advice from financial experts before applying for this loan. Many people borrow without any knowledge. Through the consultation, you may find that you can do without the loan you are about to take out.
The consultation also helps to understand the credit market. For example, compare different lenders, understand their terms and conditions and repayment options.
Speaking to kenyans.co.ke, James Nk’onge, Sales and Relations Manager at Stima Sacco, shared his take on what to consider when getting a loan .
Nk’onge argues that there are two options to be weighed; either go for low-risk companies that will bring low returns, or venture into high-risk activities where high returns are expected.
âYou can choose to venture into low-risk ventures, such as investing in the stock market, in cooperative bags or venturing into an open-ended trust. On the other hand, one could venture into high risk business such as real estate, matatu (transport company) business, or even venture into forex business which is high yield business. . James highlighted
Undated file image of Kenyan banknotes held in a hand.