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How to get out of debt

SUNDAY MAGAZINE
By Jacqueline Mahugu | January 13th 2019

1. Pay off debts with high interest rates first

In this era where so many apps offer instant loans, you are likely to have several loans with several financial institutions. These usually come with different interest rates. If you are in this situation, start by paying off the ones with the highest interest rates. This is to avoid those high interests accumulating and making your debt burden even heavier.

2. Consolidate small loans

Work out how much you are getting as monthly income, do a budget, then decide if it is proper to take one major loan to repay off all the loans you have so that you can only service one. You also need to review how you would repay this second loan. If this is a good option, do not take on any more debt. With the new loan, you can shop for a lower interest rate. It will also help you avoid paying late fees and dealing with multiple creditors at the same time. There are also debt payoff apps that you can use to help you with planning. Try Debt Payoff Planner or Debt Payoff Assistant. In addition, you should look for extra ways to make income no matter how small, just to ease the burden.

3. Involve your family

Plan wisely. Most people, especially men, go for loans without engaging their family members. That causes huge problems in the family, because usually that person is the breadwinner but their payslip reads negative. This can cause strife and more financial problems down the road. Sit down with your family, especially your spouse, and work out a plan in which to repay off the debts without adversely affecting the family. This will also help them understand the sacrifices that they have to make in the meantime as you restore the family’s financial status.

4. Avoid impulse purchases

When you are in debt, paying off the debt should be your priority. Avoid buying anything you have not budgeted for. Shop with a list and stick religiously to it. Should you come across an item that you feel in the moment you need, do not buy it at that moment, rather go home and go over your budget in relation to the item. If after waiting you come to the informed conclusion that it is a crucial item despite your being in debt, only then should you purchase it. Tame the urge to buy anything on the go until you are well out of debt.

5. Categorise your expenses

You need to prioritise and decide what your most crucial expenses are. If you have children, your most crucial expense is school fees, but after that, rent and utilities come next. Take care of bills that could put you or your family in a dire situation first, those that have immediate consequences such as repossession and then sort the rest later. Some expenses are negotiable with the people or institutions you owe, so you can agree on a plan of payment, so as not to sink into further debt.

6. Make prompt payments

Even if you can negotiate on plans of payment, avoid procrastinating on debt-payment as much as you can. This is because if you default, your debts will increase as interest accumulates. The money you use to pay debts when you do not have to could have gone into savings or investments.

7. Make bare minimum payments

This means that if you are servicing a loan at sh50,000 per month but due to some circumstance you cannot pay the amount due, try as much as possible to pay the minimum allowed. This is to prevent your debt from accumulating by defaulting. In Kenya, defaulting can get you listed in the Credit Reference Bureau (CRB), which will adversely affect your credit score and credit history. This will work against you when you try to get loans and even jobs later on.

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