DOs and DONT’s of Borrowing Money

mkobo.com.ng
Sep 1, 2018 · 5 min read

We have all experienced gaps in our cashflow at one point or the other and in situations like this we sometimes have to resort to a getting a loan from families and friends or from a financial institution such as a Bank or Microfinance Bank, Credit union etc. especially for businesses. Borrowing money is something that we may have to do at one point or the other in the course of our life, therefore it is important that you are armed with the dos and dont’s before committing to any form of debt.

DO shop around before making a decision

Before you make a decision on which lender or product you are going to settle for, you need to shop around and compare products from different Lenders. With the rise of FinTech in Nigeria there has been a surge in the number of lenders willing to extend loan to people. You can borrow money from Commercial Banks, Microfinance Banks, Finance Companies and FinTechs (most are not licensed by CBN but have what Consumer Credit Licenses). Rates varies widely with the Commercial banks averaging 25% per annum while Microfinance banks ranges from 30% to about 60% per annum and some FinTechs charge as much as 1% per day which is 360% per annum! So it is imperative you ensure you do your research before committing to to any particular product.

DO choose the right product

You need to ensure you ensure the loan product you choose is right for the purpose you are borrowing for. Using a short term loan product for a longer term purpose could lead to problems down the lines also short term loans tend to have higher interest rate. So ensure you match the loan product and duration with the purpose it is to be used for.

DO borrow what you can afford

You need to ensure you can afford the monthly repayment. When you borrow morning the lender will charge you an interest which is usually repaid with the the principal on a monthly basis, this is how they make their money. Ensure that the monthly repayment is affordable, so you should do a budget to know what your monthly outgoings are and what is left over. In Nigeria as a rule all Lenders are required to ensure they a borrowers monthly repayment is not more than 33.3% of the person’s monthly salary.

DO borrow for the right reasons

It is imperative that you borrow for the right reasons because you will be paying interest on the money you borrow. So if you borrow for the wrong reasons or depreciating asset this is considered bad debt. For example borrowing money to buy that new gadget which you do not really need is usually not a good idea, however if that gadget is to be used for business and will be earning you an income which can then be used to eventually pay off the debt then that is a good reason. Borrowing to start or grow your business to purchase an asset that can earn you income is a good reason.

DO Make your repayment on time

Ensure you repay your loan on time. If you are the type to forget, then technology is here to help! You can now setup standing instructions with your bank to make the payment on your behalf every month. Its really simple you just complete a direct debit/standing order mandate with the details fo who to pay, how much to pay and what date and for how long, submit it to your bank and they handle the rest. Most lenders will also accept post dated cheques which they will then deposit on the agreed date, all you need to do is ensure your account is funded.

DON’T take on bad debt

It is not advisable to take on bad debt. Consumer debt is generally considered as bad debt, this is because taking on a debt for something that will depreciate is considered bad. You take a loan and pay interest on it for a few months or years for something that is losing value for which you enjoy for a short period of time. If you need to buy that new dress or shoes or go on that vacation it is better to save up for that item and buy it when you can truly afford it.

DON’T ignore communication from your lender

If you are experiencing any difficulty with your repayment, do not avoid your lender, hoping the problem will go away. Instead you should reach out to them immediately you are aware that you cannot meet up with your repayment. You will find that majority of lenders are understanding and will work with you to find a workable solution. As long as you are open and honest with them, they can sometimes reduce your month repayment or extend your loan for a longer period of time.

DON’T go overboard

Do not go overboard with your borrowing. Ensure you only borrow what you can afford. If you already have a car loan, does it make sense to add a personal loan on top of that? If you keep looking at debt as your financial solution, it can slowly eat you up and you find yourself with very little left over from your salary every month. It will be like you were just working for the lenders.

DON’T make borrowing an extension of your salary

Do not get into the habit of borrowing or making borrowing an extension of your salary, especially in an emergency. It is much better to save a portion of your salary every month even when you have a loan. This can act as an emergency fund when you you need it.

DON’T keep your debt a secret

It is not a good idea to keep your debt a secret from your family especially if you are in a serious relationship or married. If your partner is aware of your debt it can help ensure that you keep on top of it and if you do encounter any problem, they may be able to help or advise, and also knowing that you are not alone can help you overcome any issue you may encounter.

mkobo.com.ng

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Provider of quick, flexible and affordable short term finance to MSME and Individuals

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