How to break out of the loan cycle

WE have all borrowed something at least once in our lives. Borrowing is convenient and helpful, as it gives a person access to something that they need immediately to help them improve their current situation. The problem that many of us have with borrowing is that we are often not prepared to return what was borrowed. It is the same with money, and Kerryann McCourty-Simmonds, NCB’s consumer products and sales manager for retail banking, says that borrowing is a habit that can become detrimental when loans are not paid back on time.

“Many women find themselves in debt or loan traps today as a result of a myriad of reasons,” she shares. “It may be that they have not been budgeting, they have not been spending wisely, or they may have found themselves in situations where they would have to spend money that they don’t currently have.”

She says, however, that this is no reason for women to despair, as it is possible to get out of the loan cycle and attain financial independence. She shares the following steps that women can follow that will lead them out of the debt trap.

Make a list of your creditors

“What happens is that you may find yourself with a long list of creditors. What you can do is look at the list of creditors, and determine whom you owe the most, whom you owe the least, and how you can consolidate your debts. You can also look at refinancing options. For example, you may realise that you owe $3 million, and this amount is owed to five different institutions with different payment periods. You can look at amalgamating all of those debts into one over a five-year period, and you pay a small amount each month. What will happen is that you will have more money at the end of the month so that you can do other things with it and get yourself out of the loan trap.”

Avoid using money that has been put aside to pay outstanding debt

Spending money that should go toward financing your debt will only sink you further into debt.

“If there is a salary deduction arrangement and the money that is deducted goes into a particular account, do not use this money to do anything other than what it was designed for. Ensure that payments are on time, and that you do not incur unnecessary interest expenses,” she says.

Set bite-size financial goals

“Instead of saying you want to achieve X in five years, what you can do is break down this goal into yearly periods. Ask yourself, ‘What do I want to achieve each year, and what do I need to do each month in order to achieve that?’ The goal may be to achieve a house in five years, so you have to now start saving towards the deposit on the house, and towards the legal expenses that are associated with the house,” she advised.

Don’t splurge

McCourty-Simmonds advises against a habit that many of us have, to spend unnecessarily on cheap (or not so cheap) thrills. “Don’t spend money when you are depressed,” she warns. “Don’t go out and buy jewellery or clothing that is not needed to feel good at a point in time, especially with money that you have put aside towards your goal, or money that is to be used to pay any outstanding loan.”

Don’t spend more than you earn

“This will guarantee that you can put aside some money for a rainy day so you can save towards your goal, or to pay off your loan,” she says. If your expenses for the month are exceeding your salary, then you either need to be earning more, spending less, or both.”

In order to do this effectively, McCourty-Simmonds recommends that you keep a running budget, so that you can track your expenses and identify where your shortfalls are.

Ensure that you use your loans wisely

“Do not take a loan to finance something that you can do without. Ensure that whatever loans you take, they are supposed to help you to reach your goals, or that you can safely make the monthly loan payments towards these goals,” she says.

Avoid bad credit

McCourty-Simmonds adds that you should be careful of your borrowing reputation, as with credit bureaus on stream, financial institutions can now check your credit history before giving you a loan. It can also affect the amount you end up paying for a new loan if you ever need one.