The cost of taking multiple loans

A man holds bundles of cash. Several people take on many loans that eventually cripple their businesses or sink them into debt. Photo/Michael Kakumirizi

What you need to know:

  • As the rising cost of living stretches budgets to their absolute capacity, some people are taking on too many loans to get by.

Some people are getting hit with one unexpected expense after another. In turn, they are piling on debt that just doesn’t seem to end. 
Whereas it may seem like debt is a part of life, whether it is a home loan to secure a roof for the family, an education loan for one’s child, or a personal loan taken to take care of an emergency such as hospital bills, it is unavoidable these days.
So much so that some people feel overwhelmed by the debt they have piled up as the deductions “are just too many.” 

With the rise of multiple liabilities, it is easy to fall into a debt trap that will not only have an incapacitating impact on your financial health but also unfavourably impact your creditworthiness for the foreseeable future.
The pressure from high-interest loans can create a huge strain on your mental and financial well-being if your debt is not within manageable limits. Like any other person, many corporate people are struggling with that, even when their salary is insufficient because of multiple loans.

Isma Kashaka is an employee of one of the corporate companies. He notes that after acquiring a loan from a bank, he applied for a second loan from his company, SACCO.
“I got these two loans hoping that my issues would be resolved. Things are not going as well as I had planned. It is now coming to two years, and I do not get a salary because as soon as my salary lands on my account, it is deducted by the bank and SACCO. I no longer check my accounts for money,” Kashaka laments.
“I can barely expect anything at the end of the month because there is nothing for me to receive, yet I have expenses to cater for. I am choking on these debts. I’m short on what to do,” he says.

He is not alone. Several people take on many loans that eventually cripple their businesses or sink them in perpetual debt.
Due to such inevitable circumstances, some people are forced to resort to other avenues through which they can get loans, prompting many to run to money lenders or borrow from within their circles or from friends and family, which they can hardly repay.
Diana Nakato from the Uganda Police says there are several reasons why people acquire multiple loans or debts.

This, she says, results from the “meager” wages one receives, yet one might have several responsibilities ranging from medical bills to taking care of siblings or relatives, hence putting a strain on one’s budget or salary. 
“Challenges keep surfacing, and sometimes one fails to know how to handle them. At the end of the day, there is a need for additional financial support where one applies for a loan or goes to money lenders,” she says.
She adds, “Financial institutions cannot offer you multiple loans. This leaves options for money lenders who offer quick money but also have higher interest rates due to the urgency of the money required.”

Nakato notes that if an officer gets a loan from the bank, he will have to service it until it is fully paid. He or she may not qualify for any other until it is fully or almost cleared. If it means taking all the salary and leaving a person without anything on their account, then that will happen.
“The question is how the person will survive? Is there a way that at least financial institutions can deduct a certain portion of what we owe them but also leave another portion for us, sort of striking a balance?” she asks.

 Hildah Twongyeirwe from Women in News, says servicing multiple loans implies that someone is perpetually working for the financial institution.
“As soon as you finalise this loan, you will get another one. This means that you cannot save and it puts you under tension that arises from servicing one loan after the other, which tends to arise due to the high-interest rate on the loan,” Twongyeirwe says.
Considering the urgency of the loan from money lenders, many people do not fully analyse the terms and conditions.
Citing an example where her friend would qualify for a loan of Shs180,000 but they would give her Shs100,000.

“When it came to paying back the loan, she would pay a lot more than she had acquired,” she recalls.
This, she says, was a very big lesson for her because she realised that the best way to manage finances is to live within your means.
“Living within your means, teaches you how to borrow but within your means so that you do not get pushed overboard,” she adds, noting that there is a lot of dishonesty with some lenders that tend to result in mental distress for borrowers due to the stress surrounding servicing multiple loans.

How banks avoid multiple borrowers
 Michael Segwaya, executive director and chief finance officer at Absa Uganda, says the the central bank has set up the Credit Reference Bureau (CRB) that assesses the affordability of the customer.
“Before lending to a customer, we first go to the CRB and understand what is happening with the other players. That way, we will understand what installments you have owed them before we provide credit to this customer,” Segwaya says.

A credit reference bureau supports the robust growth of the financial sector by providing timely and accurate information.
He, however, notes that there will be challenges in regulating circumstances where customers are borrowing from unregulated sources or certain SACCOs. For instance, one could be borrowing from relatives, there is no way any system will capture that.

Excessive borrowing  
 According to Rashid Musisi, chief manager of corporate and SME at Centenary Bank, says that multiple borrowing affects customers, especially those in businesses, as a result of the desire to mobilise more capital.
‘‘Many times when customers make a mistake, we always advise them to ensure that their capital structure is conjured in a way that you would not exceed 40% borrowed funds in your capital structure,’’ Musisi says, noting that if you go beyond 40% borrowed funds in your capital structure, you will be in trouble and you might risk working for financial institutions at the same time you will risk having your business lost.