This archive report was first published on 11 January 2020.
As mobile money transfer services become widespread, the use of digital credit has proliferated, with mobile loan apps offering instant, zero-paperwork loans using alternative credit scoring models.
Statistics show that the appetite for loans runs into the hundreds of billions of shillings, driving consumption and demand, which in turn drives economic growth and social well-being.
However, debt also has unintended consequences, with cries of people deep in debt traps becoming louder and louder, having disastrous effects on the socio-economic fabric of the country.
According to financial experts, the first rule of thumb for borrowing is that you're leveraging the results of your own capital to generate more revenue, and the second rule is that the use of debt should generate enough cash inflows to cover the principal and cost of the debt.
To avoid falling into a debt trap, follow these four key steps:
- Plan your future financial obligations to know how much to save or how much profit to retain.
- Don't fall for the fancy wording of loan terms, as they often promise free credit if you pay up on time, but in reality, you can't pay it up because your income was never enough to afford it in the first place.
- Create a solid financial plan to track where your money goes, capture all your expenditure, and identify areas of concern that are against your budget.
- Prioritize your needs by refraining from purchasing items that aren't critical for survival, but instead just boost your comfort, and create a priority list to segregate your needs and avoid spending on non-essentials.
