Plan how to keep up with loan repayments when earnings fall

When Jacqueline was hired by a local commercial bank as a direct sales representative, she was relieved to have finally got a source of income, however irregular, after a long period of joblessness. 

She had been out of work for four months after she was retrenched in a programme to cut costs during the recession.  

A year before she was retrenched, Jacqueline had been promoted to a senior public relations manager, with her salary and allowances doubled to match the added responsibilities coming with her new position.    

She secured a bank loan of Sh500,000 against her new salary of Sh80,000, at a monthly repayment rate of Sh20,000 to be paid over three years.

She then set up a saloon to complement her income and was comfortably repaying the loan until she lost her job. Her saloon also soon collapsed .  

Emergency fund

Because she was only left with her emergency fund to survive on, Jacqueline asked for a grace period of four months from her creditor to look for another source of money.  

She was fortunate to get the sales job just as her emergency fund, the only source of livelihood that had seen her through the dry spell, dried up.

Her debts had meanwhile piled up and the bank was calling frequently to make a follow-up on her loan repayment. 

Four months into her new job, Jacqueline’s reprieve seems to have been be short-lived.

Her income which is purely on commission terms, can hardly sustain the loan repayment or help her to meet her other monthly expenditures.  

Jacqueline’s main problem is how to repay her loan consistently from her irregular income, a challenge that faces many people who work on commissions or operate sole ventures with fluctuating incomes.

To stay afloat in such a situation, you need to create an income buffer and a repayment plan that will work out both during low and high income tides. 

Just like budgeting with irregular income, start by adding up all your essential expenses over the months and work out the average monthly amount.

Also add the loan repayment amount to the average figure.

This will act as your monthly budget although you will need to review it in case you want to increase your repayment rate. 

Arrange them in order of fixed expenses (which include your loan repayment amount plus other bills and obligations) and variable expenses like basic necessities and financial goals.

This would ensure that you uphold your loan repayment and other fixed expenses as a priority followed by the variable expenses. 

Similarly, add up all your monthly incomes and work out a monthly average which will act as your typical monthly income.

Figure out how these average earnings fit with your estimate of monthly expenses.  

If your expenses are above this average income, then you need to review your expenditure because you are living beyond your means.

You can do this by cutting your spending, especially variable expenses until it fits into your average income.  

If the budget cannot be reduced further due to the loan repayment rate, you can consider approaching the bank (creditor) for a review of the figure by lowering it and extending the repayment period to make it affordable.   

When your monthly income is unpredictable, fluctuating above or below this average, you need to create a short emergency fund that will cushion you by compensating for lost income during lean periods and into which you can put money in times of plenty.   

The size of this fund will depend on frequency of your earnings.

But it should be sufficient to cover your average monthly expenditure.  

To illustrate this, assume Jacqueline had an irregular income ranging from zero to Sh120,000 with an average monthly income of Sh35,000 and repaying the loan at a rate of Sh20,000 monthly.

Her average expenditure is fixed at Sh20,000 and variable expenditure is Sh15,000.  

Her total monthly expenditure would be a sum of the fixed, variable expenditure plus the repayment rate which totals Sh55,000.

This is above her average monthly income of Sh35,000 so she has to trim her total budget to match this figure.  

Slash spending

She can do this by slashing her budget.

Fixed expenditure can be reduced to Sh18,000, variable expenditure to Sh7,000 besides negotiating for a lower repayment rate of Sh10,000 over an increased repayment period.

This would bring the total average expenditure to Sh35,000, equivalent to the average monthly income.

In addition, she would need to have a short emergency fund of at least Sh35,000 or more to stay afloat during low income tides.

With this repayment plan, every time Jacqueline finds herself earning higher commissions than her average monthly income, for instance in the second, fifth, eighth and 10th months, she will first meet her average monthly budget and channel the excess to the emergency fund.  

But if she earns less commissions than her average monthly income as in the first, third, seventh and ninth months, she should do her allocation starting with fixed expenses and move to variable expenses with the little commissions earned.

She can cut unnecessary expenses in cases where she is able to meet all her fixed expenses and less of variable expenses as in the first month.

Opiyo is a personal financial consultant with Money-Plan Advisory & Solutions. Email: isaiahopiyo@yahoo.com