Kenya: Avoid Bank Loan Burden With Strict Saving Plan

For the past three weeks, local commercial banks have been reviewing their base lending rates upwards to cushion their profit margins. Consequently, it would be relatively costly to borrow now than several months ago.

With rising high interest rates on loans and the prevailing high cost of living, it is important to explore ways to cut your spending.

Although you could be trying to secure credit to finance your project but is uncertain of your repayment ability amidst the increased lending rates, it makes money sense to trace your financial record for some tips. Many people avoid taking out loans for fear of default.

Assuming that you had taken a loan from a lending institution and successfully repaid it, albeit with some level of distress, it could help to look back and learn from this commitment.

Loan repayment is not easy. It takes sacrifice and commitment to clear money owed which is accumulative sum of the principle plus the interest charged.

Although many borrowers manage to pay their loans within and according to the agreed terms, only a few borrowers learn from this strict repayment plan.

What can one gather from a successful repayment?

First, have you ever asked yourself why you often find it difficult to set a savings plan and make it manageable like a loan repayment system?

Your savings may even seem meagre and leave you deep in debt whenever you try to salt away something.

But loan repayment need not be such a pain. The secret is to look at it like forced saving.

Saving is a sacrifice and to put away money successfully, you must have a commitment.

A loan is not a free offer - it is an opportunity to access the money in advance but at a cost.

The penalty that comes with credit is the interest on the loan charged by the lender. Above all, you have to work towards making your savings which is channelled as repayment.

The fact that you were able to repay your loan shows you can actually save a similar amount without supervision from a lending institution.

For instance, take a situation where you are currently saving Sh10,000 out of your net income of Sh50,000 before signing up for a loan from any lending institution.

A Sh400,000 loan at 18 per cent interest per annum for a repayment period of five years to buy an asset, will require you to make a monthly installment of Sh12,667 without fail.

At the end of the five years, you will have paid the principal Sh400,000 and a total of Sh360,000 in interest over the period, totalling Sh760,000.At the rate of Sh10,000 within a period of five years you would be able to save a paltry Sh600,000, a relatively low amount compared to the "forced savings" of Sh760,000.The same commitment and discipline that comes with loan repayment is what is needed in financial planning and execution if you have to have to make significant savings towards your financial goals.

To save Sh400,000 with the same commitment and discipline without taking a loan will need Sh6,700 monthly for the five years to save Sh360,000 extra as interest .

Likewise, if you choose to go by your saving plan of Sh10,000 monthly, you only require three years and four months to accumulate Sh400,000. By successfully repaying the loan, the bank has actually shown you that indeed you have an unexplored saving potential that you can commit to your financial goal. That is why you were able to repay your loan and the interest charged.

Mr Opiyo is personal financial advisor & coach with Tolerance Employee Financial Advisors Limited.