How To Get Out Of Debt and Loan Traps
HOW TO GET OUT OF A DEBT TRAP.
According to Bmc psychiatric, 60.9% of Kenyan residents had moderate to severe stress in 2021. Debt is undeniably among the biggest causes of stress in Kenya. Even before the pandemic and everything was running as expected, many people still find themselves falling behind in their loan repayments. Defaulting not only places significant risk on the collateral but also dries up your credit line for future consideration.
COVID – 19 has made things worse for the common mwananchi. The government initiated some drastic measures such as lockdowns that required people to work from home to fight the virus. For a country like Kenya, where roughly 14.5 million individuals were employed in the informal sector in Kenya, this spelled disaster. Many Kenyans were suddenly out of work and facing debt default. So, when you find yourself in a debt trap, how do you escape it?
- Assess Your Debt Levels.
Getting into a debt trap doesn’t happen overnight. In the beginning, you have several credit lines open to you, and you start making use of them. When you are at risk of defaulting, you start engaging in the habit of borrowing Peter to pay Paul. However, this cycle catches up with you, and you start defaulting simultaneously. You won’t notice the hole you are digging for yourself until it is too late and you are in a debt trap. The first thing to do is to understand your position. Take time to assess and record all your debts into a spreadsheet. The information to capture is how long it has been due and the interest rate accrued. Depending on the loan complexity, you may want to seek the help of a professional to help you with this assessment.
- Prioritize Your Debt Repayments.
After you have assessed your debt levels, the next step is devising a way to take care of these debts and determining which order you should do so. You will have to prioritize your debt repayment, starting with the more expensive debt that accrues higher interest rates. On the same note, it is good to ensure the most expensive loans are as short-term as possible.
- Stop Accumulating More Debts.
You can’t get out of a hole by digging a giant hole for yourself. Similarly, stop pilling more debts when you want to get out of debt. However, this is easier said than done. This is because heavily indebted people find themselves in situations where the only way to survive is by accumulating more debts. This is not good because your credit score is terrible by now, and you lend at a higher interest rate. This is because you present a risk to the lenders in terms of defaulting; thus, the lenders need to protect themselves from such threats, they are forced to charge you a higher interest rate. Therefore, if you can help it, stop accumulating more debts.
- Restructure The Loan If Possible.
Unexpected occurrences like the emergence of COVID-19 out of the blues can negatively affect you and your ability to meet your debt obligations. You should approach your lender and ask for loan restructuring when this happens. Loan restructuring involves stretching the repayment period to reduce the monthly payments. However, this would mean that you will pay more in the long run. It is still a good thing for the simple fact that it helps you avoid defaulting.
- Consolidate loan.
It can be very stressful when you have many loans from different sources, all having different maturity timelines. It is a good idea to consolidate your loans into one. The ideal lender to help you with loan consolidation should be easier to deal with regarding the cost of the loan and repayment terms. This can simplify your life and get you out of a debt trap.
- Increase your income streams
If you are a Kenyan, you probably heard the phrase “Dawa ya deni ni kulipa.” The real solution to getting out of a debt trap is improving your revenue streams. This can range from getting more revenue from your current channel or diversifying to get more income. The additional revenue generated should be prioritized to clear your debt levels.
Debt is not bad; it can help you get a financial advantage and grow to your desired heights. However, if you abuse this privilege, it can change your life drastically, and within no time, it can be very straining that you will feel you are in a debt trap. At Elevate Credit, we care about your Wallet, Mind, and Spirit. The tips provided above are meant to elevate you from the debt trap and bring you to the financial freedom where you are in control.