FINANCIAL LITERACY: BORROWING

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BY MAXWELL SICHILONGO

Borrowing is an act of obtaining or receiving something either intangible or tangible such as money on loan with an intention of paying back equivalently or with interest. This act is performed by all persons, institutions and governments alike, in order to cover excess spending above earned income in short, medium and long terms.

In line with world economic trends, parties borrow and lend under agreements that could be either mutual or written, which clearly outlines amounts or items borrowed, tenure/maturity and or interest to be added. Informally also, borrowing occurs among family members and friends both at retail and large scale depending on individuals’ classes.

This article will tackle individual borrowing habits; both good and bad, best practice, choosing good credit, avoiding bad credit etc. In life credit is inevitable and sometimes it’s necessary to borrow for major purchases or payments like educational fees , a car, a house, a wedding or maybe even to meet unexpected expenses depending on one’s needs.

There are so many major types of credit lines world over for individuals and this article highlights six main ones.

It is very important that one practices prudent financial management to assist in making the right choice among the many loan types. A distinctive line should be drawn between these loans and also know when to acquire which type.

These types are: Unsecured personal loans, Secured loans, Overdrafts, Business loans, Salary Advances and Credit cards.

  • Unsecured Personal loans – No security is required, though the borrower’s income is very important. In some circles, these are called salary or income backed loans.
  • Secured loans – Mortgages; these are title tied and others use other personal assets like car, television, cattle etc as security or collateral.
  • Bank Overdrafts – This could be either authorized or unauthorized, one overdraws his/her account for a period of time at interest. This is not good for personal use as it could put one in perpetual debt, unlike for business where it is used as a back-up fund.
  • Business loans – These loans are purely tied to business as capital or expansion money for one’s kantemba or shop. One needs to distinctively draw a line between business and personal loans, for them to avoid using a business loan on personal needs.
  • Salary Advances – Sometimes called pay check or month end loans that are availed for a month or more in some cases. The deductions are effected on one’s pay monthly and in some cases, interest is charged. These usually reduce one’s take home pay and have a huge negative effect if they are perpetually accessed. 
  • Credit cards – A credit card is often used for short-term borrowing and in Zambia very few commercial banks offer this service. However, since you’re not tied to a specific repayment term, you can borrow money as long as you need and this is detrimental world over. For many of us, this is a credit line to avoid by all means!

One’s ability to get a loan generally depends on earned or provable income that defines paying abilities, personal character, credit history, the purpose and amount required. Borrowers also should ensure that they pay particular attention to the interest rate charges, tenure and insurance cover to indemnify/mitigation against unforeseen future risks.

Currently in Zambia, citizens that are above 16 years of age and have obtained a national registration card (NRC) can be traced and their credit history viewed on the Trans Union or Credit Reference Bureau (CRB) Limited data base at a fee. So it is advisable to be careful and keep your credit history strong by avoiding reckless borrowing in order to have smooth credit appraisals.

Always track your borrowing habits and pay on time to avoid penal charges and being flagged as delinquent. It is publicly known in Zambia that apart from financial institutions even a grocery shop, furniture shop, utility company etc could report you as delinquent so long they are registered at the CRB.

When you want to borrow; be prudent, plan, understand, analyse the interest computation method and shop around for a low Annual Percentage Rate (APR). Learn about credit so that you use it effectively and as retaliated above, pay attention to your credit history and always borrow within recommended Debt Service Ratios (DSR).

It is absolutely understandable that it can be quite confusing when it comes to figuring out which loan product is right for your requirements. But it’s an important decision as it will stop you overpaying in interest and also acquiring loans unnecessarily.

By experience, I have noted with concerns when people apply for loans without purpose and need. By instinct, they just want to have some money. This is dangerous living as it is taking them to destitution and personal destruction.

However, if your credit rating is damaged because you missed payments or made late payments, over borrowed, skipped bills etc, it is not too late to improve your credit profile. While you can’t repair your credit profile overnight, it is very important that you start working towards improving it now. This is an area one needs to keep clean currently as certain businesses and employers too, check before venturing into business and offering employment respectively.

The following could help in improving one’s credit profile:

  • Stop adding new credit on other credits.
  • Track your borrowing habits
  • Avoid bank products that easily take you into debt i.e. credit cards and overdrafts.
  • Always find time to review your credit report.
  • Pay your obligations on time.
  • Always contact and engage your creditors in time if you are facing challenges.
  • Seek credit counseling from trusted and reputable people or institutions.

Good Fundamentals of Borrowing:

The sensible use of debt should be part of a sound financial strategy. Debt can enable you to enjoy things that otherwise are currently beyond your reach. Borrowing can also have an ugly side. Too much, too expensive or the wrong kinds of debt can make life miserable. Developing good borrowing habits early can help you avoid a lot of anguish later. Find below some of the fundamentals:

  1. The Basics

Borrowing costs money and it just means that when you pay it back, you have to pay more than you borrowed. The components of a good debt strategy are quite simple:

  • Choose when to borrow and what to borrow for carefully.
  • Find the best interest rate and terms, based on your needs and wants.
  • Live up to your repayment responsibilities.
  • Periodically, review your debt and refinance when necessary to save on future interest.
  1. The importance of a good credit record

A good credit record does more than just making future credit approval easier to get. Most lenders use your credit record to determine credit limits and what rates to charge. A good credit record will save you money.

  1. Common sense borrowing habits

Sometimes, one needs to use his/her sixth sense and the following should be applied:

  • Never borrow what you cannot repay.
  • Never borrow for a luxury if you cannot afford the necessities.
  • Prioritize your borrowing.
  • Reserve some borrowing capacity for emergencies. 
  1. Seek counseling help if need be

Take action immediately if your borrowing is getting out of control. If credit cards are the problem, stop using them or even cut them up. Contact lenders to develop a workable repayment plan to avoid sliding into destitution and death as witnessed world over.

  1. Consider all the terms on your loan offer letters

Most Zambians are culprits here as they have no time to read through the terms and conditions outlined in loan offer letters. They are quick in signing and getting the money, but sadly come to regret when they learn actually of what they signed for. You have to consider the interest rates, fees and associated benefits. One must understand the interest calculation mode whether it is simple or compounded, flat or floating etc. I would encourage everyone to read through these documents despite the small fonts.

The author is an Associate member of ZIBFS and Branch Manager at ZNBS – Kitwe Branch. Email: maxsichilongo1973@gmail.com Cells: 0977/0966 396191

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