Common Mistakes To Avoid When Borrowing Money

  • An undated image of an approved loan application form
    An undated image of an approved loan application form
    BadCredit.org
  • Have you ever borrowed money from a bank, friend, family member or colleague? Well, for many who had never had any experience with a loan, Covid-19 pushed them to borrowing and accumulation of debts.

    From quick loans offered by digital lenders to traditional borrowing from banks, loans are here to stay, with the effects of these credit facilities affecting almost everybody, either directly or indirectly.

    However, there are glaring mistakes that people make while borrowing money, yet these errors can be avoided. 

    Here are some of these mistakes as listed by kenyans.co.ke and how to avoid them. 

    An undated photo of a part of the Nairobi Central Business District.
    An undated photo of a part of the Nairobi Central Business District.
    Kenyans.co.ke

    Borrowing for Consumption

    A common mistake that people make when taking loans is where one borrows for consumption. Many borrow only to spend money on unnecessary expenditure such as buying trendy products, leisure travel and having fun. 

    Every time you borrow, make sure you have a concrete plan. It is important that you plan before taking a loan and ask yourself questions such as why you need the loan, how much you need and how you intend to repay the loan. 

    Avoid diverting borrowed money to unintended use and always stick to the initial plan.

    How Much Do I Need?

    Many people fail to make prior analysis of the cost of the project to be undertaken. Establish a procedure for estimating all costs involved and profits to be derived from the investments made by the borrowed funds. 

    Peer Pressure

    Never borrow money to please your friends. Many people have found themselves borrowing on the basis of social pressure. Live within your means, do not accumulate debts because you want to fit a particular status in the society.

    Don't borrow Blindly

    Seek advice from financial experts before applying for that loan. Many people borrow without any knowledge. Through consultation, you may realize that you can do without that loan you are about to pursue.

    Consultation further allows you understand the credit market. For example, compare different lenders, understand their terms and conditions and the repayment options.

    Think Twice

    Speaking to kenyans.co.ke James Nk’onge the head of Sales and relationship at Stima Sacco shared insights of what one needs to consider when going for a loan. 

    Nk’onge argues that there are two options one needs to have appreciate; either go for low risks businesses which will bring low returns or venture into high-risk business where one will expect high returns. 

    “One might opt to venture into low-risk businesses such as investing in stock market, cooperative saccos or venturing into unit trust. On the other hand, one could venture into high-risk business such as real estate, matatu business (transport business), or even venture into forex business which are high return businesses.” James highlighted  

    File image of Kenyan banknotes held in a hand on January 25, 2020.
    File image of Kenyan banknotes held in a hand on January 25, 2020.
    Simon Kiragu
    Kenyans.co.ke