The Kenyan State and her people are choking with debts. Every day, Kenyans borrow billions  from banks and mobile phone lenders. Many Kenyans are as a result stuck in endless cycles of debts. Getting out of debt is never easy. But there are tricks you can use to manage and repay your loans faster. Take a look”

Bad debt versus Good debt

There is debt that can improve your net worth, and debt that can leave you worse off. Edwin Okumu, a former credit manager who now works as a financial and tax consultant says that good debt is the kind that will help you generate more income or build up your net worth.

“Loans taken to buy furniture or fund consumerism are bad debts. Furniture may be good looking at your house but it will never appreciate in value,” he says. “A facility taken to fund a contractual supply business, or acquire a house has more chances of returning value in comparison.”

He says that your journey to being debt free should start by identifying the kind of debt you have. If you have a bad debt, pay it off first. “Once the bad debts are settled, you will free up more money that can now go to offsetting your pending good debts,” he says.

According to Pam Mutembei, a former career banker, financial consultant and the founder of This Girl Boss Hustle Kenya, bad debts are very expensive and should be paid off first. But it is not just furniture and electronic loans that are bad and expensive.

“Mobile loans and credit cards may seem affordable on face value, but they are some of the most expensive debts you could incur. The cost of credit charged on mobile loans is very expensive and yet avoidable,” says Pam.

Readjust your lifestyle

One of the critical steps you need to take to get out of debt is readjusting your lifestyle. Pam says that since you want a lot more of your money to go into settling your debts, you must reconfigure your lifestyle. A while back, popular lawyer Harun Ndubi hit the headline after it emerged that he was facing auctioneers after failing to pay rent.

He moved to court seeking orders to stop his landlord from evicting him and auctioning his property to recover rent money. He started defaulting on rent in April and owed Sh. 414,000. This amount is equal to Sh. 103,500 rent per month in four months.

Instead of accumulating such debt, it would have seemed wiser for Mr. Ndubi to move to a more affordable and decent house that costs Sh. 25,000 to Sh. 30,000 in monthly rent in a different neighbourhood.

Pam says this is the principle that should apply when readjusting your lifestyle to get extra money for debt repayments.

“Be aware of the amount that goes into paying your rent. Is it extravagant? Can you move to a different house in a different residential area that is more affordable?” she says.

Readjusting your lifestyle can also ease financial pressure and keep your credit score healthy by ensuring your repayments are regular and up to date.

For Paul Mugenda, renting out his main three bedroom house in Imara Daima, Embakasi, Nairobi has given him an extra Sh. 50,000 monthly which he is using to for his loan repayments.

“I was laid off in April 2019. I had a debt of Sh. 2 million with monthly repayments of about Sh. 53,000. I had paid off two years and still had two years to go.”

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To ensure that he did not attract penalties for defaulting on his monthly loan repayments, Mugenda took a bold and radical step.

“I rented my main house and moved to a self-contained one bedroom extension from the main house. I could have rented the extension at Sh. 11,000, but the main house now gives me Sh. 50,000 monthly. I don’t struggle with my loan, and any extra cash I get tops up in reducing my principal amount,” he says.

Target the principal

In the initial years of your loan, more of the funds you pay may be directed towards servicing your interest. Pam says that you can get clever about your loan by accelerating payments on the actual amount you borrowed known as principal.

If you borrowed Sh. 1 million for a three year period on reducing balance, suggest to your bank that you want to accelerate your repayments such that you can offset the loan within two years. “Indicate in writing that you will be adding an extra Sh. 20,000 in your monthly repayments.

This extra money should strictly go to reducing your principal amount,” says Pam. By settling your debt earlier, you will be saving money you’d have used to pay off on interest.

For example, if your monthly total debt repayment is Sh. 30,000, you will save Sh. 360,000 by paying off a year earlier. You can also use the round-off method to increase your repayments.

For example, if you pay Sh. 26,000 per month, round the figure to Sh. 30,000. The extra Sh. 4,000 will be nearly two months of extra payment within a year.

“Overtime, rounding off adds up to a significant amount that saves you money on interest and shortens the duration of your loan,” says Okumu.

Get a new budget

Paying off a loan will stretch your pay slip thin, and leave you struggling to meet your basic needs. To ease off the pressure, Pam says that you must seal all the loopholes in your monthly spending.

“Debt management is all about money flow. There is so much money that you could save from your daily and monthly budgets to avoid getting overly stretched by your debt obligations,” she says.

Trim your budget as much as possible. “How much do you spend on food and coffee in town every day? Sh. 200 per day?

This amount may seem negligible on a daily basis. In a month, it amounts to Sh. 4,000 you could save by carrying home coffee and lunch to the office,” says Pam.

“If you spend Sh.8,000 on premium pay television, downgrade to more affordable packages or even free-to-air channels and repurpose this money to more urgent financial needs.”

Restructure your loans

According to Pam, restructuring your personal loans does not mean going for a moratorium at the bank.

It means consolidating your payments so that you don’t have money getting deducted all over. “The plan is to have an efficient payment plan by consolidating your income and automating your debt repayment,” she says.

Consolidating payment is often mistaken with consolidating debt. Whereas it is possible for your lender to consolidate all your debt, you must be cautious on the terms, rates and the actual total cost of credit and consolidation you will incur.

“Debt consolidation is not the same thing as debt elimination. You may get extended repayment terms but this means that you will be in debt longer, especially if the interest rate isn’t lower than what you were paying for the consolidated loans before,” says Okumu.

He also cautions that while you can get an introductory low interest rate, there is no guarantee that it will not be reversed upwards down the road, further trapping you in extended repayments than you’d previously had.