Borrowing money in times of need

Borrowing involves taking money from a source, with a formal agreement that the funds will be repaid by a certain date. PHOTO/file 

What you need to know:

Borrowing means to take money from a source, with a formal agreement that the funds will be repaid by a certain date.

Borrowing is often a fact of adult life. Almost everyone needs to take a loan at some point depending on the situation and need. It may be for an emergency, school fees, a new home or to start a business.

Whatever the reason you have to borrow money, professional financing options are many and varied nowadays.

They range from traditional financial institutions such as commercial banks, credit unions, financing companies, and money lenders among others.

The alarming high cost of living in Uganda is forcing many people to resort to borrowing as a means of survival. 

“I am an engineer earning a monthly income but I resorted to borrowing money for my children’s school fees. I borrow from money lenders. For instance, in the last term, I borrowed Shs1m with an interest rate of 15 percent a month. I could afford to pay it back in two months yet the money lender wanted the payment to be done in one month and did not accept half-payments,” Mr Jackson Mwatuwe a resident of Namasuba Zana, a Kampala suburb says. 

 “Truth be told it is hard to survive on borrowing because of the many needs yet prices for most of the commodity prices are increasing,” he adds. 

Appropriate borrowers

Though borrowing becomes inevitably, the most feasible option for sustainability in today’s economy, according to Mr Sam Watasa, the executive director of Uganda Consumers’ Protection Association, nobody should borrow money unless they have the capacity to pay back.

“Borrowing must be based on a reliable source of income. There is also having income but an unpredictable one. If you have that kind of income, you should not consider borrowing,” he says.

The borrower should be economically active and can promptly clear the debt.

“You cannot borrow money without knowing how you are going to service the loan,” says Mr Watasa, adding that for consumers, when prices for essential commodities go high, one of the best ways to deal with it is to rationalize consumption.  One should consider borrowing money if they are going to invest in a productive venture that is going to return profits. 

“The conditions of borrowing and the investment/purpose for which you borrow the money is extremely critical,” Mr Watasa adds.

Mr Watasa highlights the fact that most times the circumstances under which one borrows and the urgency of the issue at hand will end up determining the creditor option.

For instance, money lenders will give you all the needed money very fast but their interests are very high. Banks could be a little cheaper but it could take a while due to the processes, meaning if one has an urgent issue they may never consider banks.

“Some people have Saccos, which provide low-interest loans and before going to any moneylender, a borrower should try such cheap options,” he says. 

According to the Executive Director of Banar Consult Ltd, Mr Daniel Babu Babonereirwe, before you consider borrowing, you have to look at your own needs to assess whether it is a real need for which you must borrow, or it can be avoided.

 “I discourage borrowing for something that could be easily substituted. For instance, you are driving a particular kind of car and you want to buy a new model on the market. This kind of borrowing should be avoided,” Mr Babonereirwe says.

Credit options

After ascertaining that there is a genuine reason for borrowing, the very first thing to do, according to Mr Babonereirwe is to exhaust access to credit options that are not from commercial money lenders.

“For instance, your family members and friends may have money not in use at that particular time that you can borrow. This has its disadvantages but it comes down to your credibility as far as being trustworthy is concerned,” he says. 

“It is advisable that before you resort to borrowing, one must match what they are borrowing with their cash flow. If you are a salary earner, don’t accept or commit to a paying date that is way before your salary payment date,” Mr Babonereirwe says.

  Those from whom services and goods are being bought or received can be negotiated for that needed credit, either at full or half. For example, some schools can accept deposits.

 “Other than rushing to any commercial money lender, go to the school and negotiate clear terms that you can honor which also depends on the credibility you have established with them. This will prevent you from the burden of interests,” Mr Babonereirwe says.

FINANCING COMPANIES

Conditions 

Financing companies, also known as finance companies, are outfits dedicated to lending money. Unlike banks or credit unions, finance companies do not accept deposits or provide other financial services or products. They just routinely make loans to individuals or businesses needing funds. In the case of consumers, they usually provide loans to purchase big-ticket goods or services, such as a car, major appliances, or furniture.

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