My name is Elias. I earn a net salary of Sh26,000. I work for a county government. I am about to take a loan from a local bank. The bank has offered the loan at an interest rate of 26.33 percent.
I want to use this loan to pay off my rent arrears of Sh43,000, pay my son’s Sh51,000 school fees (he is joining grade one and I want to pay a full year at a private school), pay my niece’s fees arrears of Sh14,000, and buy three sheep for my mom at Sh8,000 to Sh11,000 each in the village.
The loan is for two years. My wife works as an intern teacher at a primary school and earns about Sh13,000 which helps with household groceries. What is the most favourable loan amount that I can take that will not hurt me too much? Am I making the right decision? How do we plan our budget to become financially stable? Please help us.
Dominic Karanja, is a financial planning and investments consultant.
It's commendable that you're seeking professional advice before committing to a loan, demonstrating a proactive approach to financial management. While the loan might provide short-term relief, it's crucial to evaluate its long-term implications carefully.
According to standard financial planning principles, an employee's take-home pay after statutory deductions should represent at least one-third of their basic salary.
Based on your net income, your gross salary is approximately Sh30,000, with a recommended post-deduction take-home of Sh10,000.
Your immediate financial needs total between Sh132,000 and Sh141,000, encompassing:
Rent arrears: Sh43,000
Son's school fees: Sh51,000
Niece's school fees: Sh14,000
Sheep purchase: Sh24,000-Sh33,000
Loan Strategy and Financial Management
To effectively manage your financial situation, developing a comprehensive budget is essential. Involve your spouse in this process to ensure mutual understanding and agreeable expense allocation. Prioritise essential expenses and minimise discretionary spending.
The outstanding rent arrears suggest you might be living beyond your means. Consider more affordable housing options and start building an emergency fund covering at least six months of living expenses.
Loan Recommendations:
Loan Repayment Capacity: Ideally, commit no more than one-third of your net pay to loan repayments, approximately Sh8,700 monthly.
Recommended Loan Amount: Given the high interest rate and your current expenses, a loan of Sh100,000 seems more manageable. This would cover critical needs while ensuring sustainable monthly repayments.
Loan Terms: A two-year term is reasonable, but the 26.33 percent interest rate is significantly high. A personal loan of Sh100,000 at this rate would attract monthly instalments of Sh5,400.
Alternative Strategies:
Postpone purchasing all three sheep
Consider cheaper credit sources like SACCOs
Explore side hustles to supplement income
Long-Term Financial Planning:
Commit at least 20 percent of monthly income to savings and investments
Join a SACCO for more favourable borrowing terms
Consult a financial advisor for personalised guidance
If you have any money problems, or if you’d like advice on managing your finances, feel free to get in touch at [email protected].
