Monday, 1 October 2012

To Get a Loan OR Not to Get a Loan? That is the Question


This is one of those sensitive blogs that I need to start with a disclaimer before some self-proclaimed "financial guru" goes up in flames. So the views expressed in this blog are my humble opinions based on my average accounting knowledge, my father's wisdom, a number of financial books and friend's experiences. Now that we got that little bit out of the way we can get to the gist of things. There is no denying that the middle class in Zambia is growing by the day. These are a group of individuals who have a fairly good amount of disposable income in their accounts to spend on whatever they wish. Like any country with its population classified in the middle income, so does the need to access more cash arise. More often than not, loans are usually considered. The question that someone has to grapple with is whether to get a loan or not to get a loan?
Accessing loans almost two decades ago in Zambia was a sweat breaking battle that did not always bear fruit. One had to find a financial institution willing to take the risk and provide the loan. The individual had to put up collateral against the loan usually in the form of a house. On top of this they had to pay exorbitant interest rates well above 35%. This was all because Zambia was considered a high risk country when it came to defaulters on loans. Who could blame the banks anyway, with people in employment one day and the next day being a statistic of the unemployed millions, banks had to cover their backs. Meanwhile, developed countries were offering loans to their clients at interest rates within 3-10%. Something only imaginable in our dreams. With such cheap cost of capital, a large percentage of these countries populations had loans. 
  This is now 2012, the middle class is growing once again, banks have reduced their interest rates; collateral is no longer a requirement for permanent employees for some loans, and more banks are expected to flood the Zambian market in the future. Today, banks are literally begging people to get loans with constant advertisements of reduced interest rates and increased recruitment of direct sales representatives. We are so spoilt for choice if you ask me. These generous offers of loans have been well received by the working class. People have started going to the banks in order to finance all manner of activities, from buying land to purchasing a vehicle, starting a business to having a lavish wedding or even going on holiday to Dubai to buying new furniture for the house. Personally, I have not been overly excited by the banks reduced interest rates. I have been rather sceptical and have attempted to stay clear of them. I generally hate debt and always do my best to avoid it.
  I have always lived by the philosophy that only get a loan if it is going to add value or bring in income. If the reasons why I want to borrow does not fill this bill, then it is not worth getting the loan. In whichever way you look at it, a loan sucks money out of your pocket. Every month, you have an obligation to make repayments until such a time that you have repaid the loan with interest.
  The fact that someone is eligible to get a loan does not necessary mean that we have to get one. However, there is a common trend that is developing in Zambia, and that is 'Keeping Up with the Bandas'. Just because my colleague has bought a car, I should also feel compelled to buy one too. So what do I do, I go get a loan for a car without really factoring in the cost implication on my salary and other additional expenditure, I will have to incur. Few people are content with what they have; they always want what the other person has. Some have attached this to status and a symbol to the rest of the world that they are doing well. It is simply boosting and foolishness in all honesty.
Before I rush to get a loan, there are certain questions I ask myself:
·         Can I sustain a Loan?
When many of my peers were getting loans for a car, I was almost tempted to rush to the bank and get one myself. Thank God, I restrained, because in hindsight, my salary at the time (two years ago) could not sustain a loan. When I further, scrutinised the people who were getting these loans for cars, I discovered that they were either staying with their parents or in their parent's houses. Others had other streams of cash flow. These were none of the luxuries I had. I was paying rent and at the time my sole source of income was the salary. You can only imagine the financial stress I would have been under if stupid me decided to kick in and rush to the bank. I would have been living from hand to mouth with no savings whatsoever. Savings are a critical part of me and it is a habit that I have to save for when the well runs dry. Unsustainable loans know, no such foreign words as saving. I would have been definitely forced to borrow from friends to see me through some months; hence the spiral of debt would have tangled its wretched hand around my neck.
·         Will the Loan Add Value?
This is one of the fundamental issues that I seriously consider. Will I use the money that I get from the loan to add value to my life? Am I using the loan for a business, education, building a house or buying land? I have deliberately not included a car in the last sentence. This is because for some people getting a car is more of a liability than an asset. When I mentioned to a friend that I wanted to get a loan for a Toyota Corolla, his response was that I should get a better car like a BMW. Now I knew the exact frame of mind he was coming from while trying to convince me. Yes, I can get a loan to buy a BMW with all its German made aura and big headlights but what is the reason I want a car? At the moment, it is purely for transportation purposes only. I am constricted for time and with increased business ventures forthcoming a car is of the essence. Prestige and a double glance by the ladies is not my priority. If a Peugeot 504 was cheaper than a Corolla and could get me from A to Z, then that is a car I would get.
·         Do I Really Really need A Loan?
Many people have different reasons for getting a loan. I repeatedly chose to ask, do I really really need a loan. If the answer is no, then I will not consider it. Often times, a loan is not needed to finance all of the things people get loans for. They can make some sacrifices and save up for the financial need. However, some lack the discipline to save up but the banks can help with this by setting up fixed accounts and direct debits to this account once your salary is received. There are even some friends and family who are willing to provide the money without charging interest at all, as long you are good on your word. There are just some things that people should not even consider getting loans for, such as weddings (have a small wedding dammit, we will eat and drink and leave you with the loan), vacations (proper saving should be able to cover this), and anything else that has more to do with satisfying your ego than a need.
·         Interest Rates and the Finer Details
The interest rates that are dropping and are expected to drop further, most people may take this as an indication of cheap loans. It may be true, but it is still important to know how much you would have paid above the principle over the period of the loan. This might be a bigger amount than you imagined or are willing to part with. Many people are of the assumption that their salaries can only increase in the future. Optimism is good, but things do change. The world economy is a funny beast. Your salary may end up going in the wrong direction. I also like to know whether the interest rate is fixed or floating. By fixed, I mean that the amount that I agree upon today will not change despite external factors. So if the interest rates wasto increase or decrease I would still pay the interest rate agreed. A floating interest rate is one that varies according to the economic conditions. Furthermore, I find out the finer details that are in small print. What are the administration costs, or any other costs that I should be aware of.
While we can expect the middle class to grow, interest rates to drop, more banks to come into the country, we cannot allow ourselves to be ‘High Indebted Citizens’. It was like yesterday when as a country, we were fighting to remove the label of ‘Highly Indebted Poor Country’. My plea is that people should stop acting on impulses and make a critical assessment on whether they really need to get the loan or not. It does no harm having a second opinion from objective family and friends, people who you know will tell it to you as it is and not mere opportunists. It is you who will be repaying the loan mind you. More efforts need to be done by the communities, government and other related stakeholders in educating the public on the pros and cons of accessing loans. We cannot expect the banks and financial lending institutions to do this on our behalf after all they are in it for the profit. So this brings me back to the beginning, to get a loan or not to get a loan? That is the question and yours to answer.

3 comments:

  1. This is an article a lot of Zambians need to read.

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  2. Hi Kate, yes indeed a lot of Zambians need to read this. Spread the word

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  3. These are some really good and solid, comprehensive advice. Thanks for this. Whether to get a loan or not is really a personal decision. What any of us can only say, and that I can say, is to never be afraid of loans. Period. There's the stigma that keeps us from contemplating it, and a fear of being incapable of committing to its obligations and paying back. Well, that is easier said than done to a certain extent, when you find yourself in debt, and wondering how you got there. But the thing is loans can be managed; it's just a matter of having a system about it, and a few trusted folks to supervise.

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