Drowning in debt? Here's how to break free

Drowning in debt? Here's how to break free (Photo: Gemini) Debt has become a normal part of financial life. From mobile loan apps to bank credit facilities, borrowing money is now faster and easier than ever. However, while access to loans has expanded, many people still struggle to understand how debt works and how to manage it responsibly. Financial literacy expert Patrick Wameyo says that easier borrowing and low financial literacy have created a situation in which many people are taking on loans without fully understanding their impact. Patrick recalls the late 1990s, when banks issued personal loans only to borrowers with substantial wealth or strong collateral. Ordinary salaried workers had little access to unsecured loans. Then, in the early 2000s, the financial system experienced high liquidity. He remembers banks and other financial institutions starting to introduce personal loans to a wider group of customers, particularly people with pay slips and established businesses. Today, due to technological advancements, digital systems allow lenders to access personal financial data quickly. Identity details, like national databases, can be linked to credit reference bureau records and other financial information. Within seconds, lenders can assess a borrower's loan profile and assign a credit score. "This means that a person only needs an identification number and a phone number to access a loan," he says. While these innovations have made borrowing more convenient, they have also created new risks. Many digital lending platforms focus on credit scores rather than a borrower's understanding of debt or their overall financial obligations, he notes. In some cases, lenders even bypass formal credit reporting systems altogether, and as a result, people can take multiple loans without knowing how much they owe in total. Personal loans, he says, have become the most common form of borrowing today. Many mobile loan apps offer consumer credit rather than business financing. "For many borrowers, these loans are used to manage everyday pressures such as social obligations, lifestyle expenses, or short-term financial gaps," he says. Patrick adds that there are good debts and bad debts; at the moment someone takes a loan, it is neither a good nor a bad debt. How the money is used is what determines whether a debt is good or bad. "Debt becomes productive when it supports economic growth in a person's life. For example, borrowing money to fund an activity that generates income can potentially improve long-term financial stability," he says. However, loans used mainly for consumption or lifestyle spending rarely create financial returns. He identifies bad debt as when borrowed money does not result in economic gain or when the borrower cannot repay it. What turns debt into a problem is the borrower's capacity to repay. Many young borrowers, he observes, choose loans with very short repayment periods without carefully evaluating whether they can meet the monthly instalments. When repayment becomes difficult, people turn to new lenders to cover existing loans, creating a cycle of borrowing that can quickly spiral out of control. This situation is referred to as a debt trap. A debt trap, he explains, occurs when someone accumulates so many financial obligations that they can no longer comfortably service them. "Responsible lending systems should prevent this by evaluating a borrower's total outstanding loans. However, some digital lenders still give new loans to people who are already heavily indebted," he says. A sign that you are in a debt cycle is difficulty repaying a loan. Patrick recommends monitoring disposable income, which is net pay. A general rule of thumb is that no more than half of disposable income should go toward debt repayments. Once borrowers start seeking loans from increasingly expensive sources that do not consider their credit history, it usually indicates that financial pressure is increasing. "Lifestyle expectations and consumer culture also play a role in driving debt. Borrowing begins with the desire to obtain something that cannot instantly be afforded," he says. When the loan terms are expensive and repayment exceeds a person's financial capacity, it will lead to financial pressure. He adds that financial literacy can prevent debt problems by enabling one to understand the real cost of borrowing. Many borrowers, he notes, focus only on interest rates without considering the annual percentage rate, which includes additional fees and penalties. "Without this knowledge, the true cost of a loan can be significantly underestimated," he observes. Debt can also affect mental and emotional well-being, and he states that financial wellness is the foundation of overall wellbeing. "When someone is under severe financial stress, it can impact many aspects of their life," he says. Before taking out a loan, he advises borrowers to ask themselves whether the loan will improve their financial situation and whether they have the capacity to repay it.

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