Important Links

Member Login
Menu
Member Login

Causes of Bad Debt, Part 1

Life presents us with multiple investment opportunities which are time-bound. In most cases, we are not able to seize the opportunities either out of fear of failure, risk or lack of funds to start off.

Good loans help us seize investment opportunities when they arise. A good loan gives a higher rate of return than the cost of the loan, taken with a clear purpose and with a clear repayment plan, paid within the shortest time and is affordable.

However, many Kenyans especially the youths fall into the trap of bad loans leading to poor on-job performance, strained work and family relationships, poor health and in some instances death.

So why do people fall into bad debt?

  1. Spending money you have not yet received.

We have noted cases where salaried people survive on salary advances every month. We also have people who spend based on a cheque at hand even before it matures. Some people go the extreme of taking goods on debt such as clothes, shoes and other consumables on expectations on money to be received at a later date say tea bonus or coffee payment. What happens in case of bounced cheque, job lay off, or produce payment received is much lower than expected?

  1. Borrowing to buy depreciating items.

Many people get into bad debts because of taking loans to buy items that lose value significantly with time like vehicles, furniture and clothes. It is much wiser to save to acquire these items or if you must borrow to acquire assets like a vehicle, ensure you service the loan within the shortest time possible.  For other luxuries like clothes and furniture, if you cannot afford it simply do not buy it.

  1. Becoming a surety for people who don’t pay their debts.

Before signing a loan form for somebody as a guarantor make sure you do a background check on the person and check on their ability to pay for that loan. Remember when you sign you are simply entering into a contract with the financial institution declaring that in case that person fails to pay off that debt you will pay for it or your personal property could be taken to clear that debt. Also Guarantee loans whose purpose is clear and make economic sense, follow up to see that the loan taken up goes to the intended purpose.

  1. Living beyond your means.

Allocate your income wisely with at least 10% going to savings and 10% to Investment. If you find that you spend 30% of your income on housing then it means you are living an extravagant life. Take your children to good but affordable schools. You don’t have to live like every other person around with you if your lifestyle strains your income you should downsize immediately.

KEY TAKEAWAY

  • Bad debt involves borrowing money to purchase depreciating assets.
  • Good debt is a loan that has the potential to increase your net worth.
  • Determining whether or not a debt is good or bad sometimes depends on an individual’s financial situation, as well as other factors.
  • Do not be extravagant, live a life that you can comfortably afford. Remember delay is not denial, be constant on your savings, invest wisely and take a good loan that will push you up the ladder.

Need a friend to help you Plan Smarter so you can Live Better? Talk to us!

POPULAR ARTICLES

Save

Invest

Borrow

Ways to Bank

Contact Us

Branches

Telephone: +254 729 333 444/ 0111 026 100

SMS Code: 20298

Email: hello@amicacs.co.ke

© 2024 Amica Savings & Credit Limited. All Rights Reserved.