Money Management

10 Warning Signs You Are Not Ready to Take a Loan

February 11, 2023

Getting a loan can be greatly beneficial in your financial or personal development journey. The rationale for getting a loan is that there is great value in investing today’s money as compared to the future money. Thus, accessing credit could help you buy a home, start a business, buy a car, or pay for education that will have great long term financial benefits.

Like everything in life, there are pros and cons for taking a loan. Despite the many pros, a loan could have disastrous effects in your life and affect your finances. Thus, this article highlights 10 warning signs that should tell you that you are not ready to take a loan.

1. You Have No Concrete Plans on How to Use the Loan

One of the greatest benefits of taking a loan is that it allows you to finance an activity or an engagement that will have great returns in the long term. A loan taken to finance your education will allow you to get a better salary in the future. A loan to finance a business is expected to result in a bigger business with bigger returns at some point in the future.

However, if you have no well-thought plans on how to use the money obtained through a loan, it is a major red-flag that you are not ready, or you do not need the loan.

Thus, it is advised against taking a loan and keeping the money in your account - “as you think of how to use it.” Money obtained through debt is affected by inflation and interest rates. This means that a shilling borrowed today will have a lower value by January next year.

2. Your Income is Unstable

One of the first things lenders often ask in the loan application process, is a payslip or bank accounts to confirm the applicant’s income. Microfinance institutions will also consider your M-PESA statements as a way of determining your income size and frequency. This is because loans often involve structured payments to facilitate regular servicing.

However, if the income is unstable or inconsistent, having regular servicing becomes difficult. Every missed repayment will typically attract a late payment fine which adds to the overall interest cost of the loan - and can make the loan very expensive if it escalates to the point of the lender having to employ debt collectors.

Thus, it is advisable to wait until you have consistent and stable income, if the loan is for personal use. If you are considering a loan for your business, it is equally apt to wait until its operations have streamlined to the point of making predictable, consistent income.

Note that even if a lender may approve your loan request, the fact that your income is unstable will not change.

So if the amount and frequency of your income is a little inconsistent, you may want to consider postponing your loan application to a later date when your ability to repay what you have borrowed is more assured.
Read Also: 7 Ways to Budget and Thrive With an Irregular Income

3. You Have no Disposable Income

A common mistake when taking loans is the temptation to take a loan for purposes of supplementing your income in the short term.

If your income is exhausted by other bills, taking a loan is most likely a big financial mistake. This is because it would mean that the debt cash will be spent on consumption and the re-servicing, and it will probably be impossible to repay unless the same loaned amount is preserved for debt repayment.

As you plan to take a loan, ensure you have planned out your expenditure to leave you with some disposable income that can adequately service the loan you wish to take. It is advisable to have had a consistent disposable income for at least six months before taking on the loan.

You may find that you actually don’t need a loan, but instead the solution to the financial issue you are dealing with could be starting to live below your means or creating a new income stream.

4. You Have a Habit of Running Late in Paying Yours Bills

If you have a habit of running late in paying your bills, it is a major sign that you are not ready to take out a loan.

Receiving the money and seeing a huge balance may feel sweet and you may see it as a great accomplishment. However, the arduous task is in repayments which requires discipline and consistency.

If you have a habit of running late on your pre-existing bills, it may be the wrong time to take on a loan because a delay in repayment will not only attract fines, but also dent your credit rating in the long term.

5. You Already Have Outstanding Debt From Family and Friends

Most formal lenders will ask for a report from the Credit Reference Bureau (CRB) confirming you have not defaulted on any other loans. They also confirm if you have outstanding debt and if so, they confirm if it is significant enough to affect your new debt undertaking.

Also Read: Consequences of Being Listed in CRB Negatively

However, the formal loan application process may not consider other informal loans - such as debt taken from family, friends, shylocks, and other informal lenders.

If you already have outstanding debt, it may be a warning sign that you are not ready to take further debt and the financially prudent thing to do is to first clear the outstanding loan.

6. Going Through a Significant Life Transition

If you are going through a major life transition, it may be the wrong time to take a loan. Examples of transitions are: you have just had a baby, just bought or built a new house, starting out a new job, just transitioned from employment to entrepreneurship etc.

Having a loan - save for emergency and digital loans - is typically a long term financial responsibility and it is important to be sure that the new lifestyle changes will not interfere with your ability to make debt repayments.

For example, a baby may introduce new expenses that you had not foreseen when calculating the amount you can comfortably use to repay your loan.

Also Read: Starting a Family in 2023? Here are 8 Things You Should Know

7. You Have Just Cleared Another Debt That Had Become Overdue

In the US, the financial services sector has a term referred to as seasoning. This is the phase where a past borrower with a record of defaulting has finally managed to clear the outstanding amounts.

The lenders typically avoid lending to such borrowers and this is reflected in the credit scores. In Kenya, many lenders will not deny you a loan on account of a history of default - so long as the amount has been cleared.

However, it is a good personal financial rule to avoid taking on new loans - just after you have cleared a debt that had fallen into default.

The same applies to victims of bankruptcy or auctions.

Also Read: How to Check Your CRB Report and Understand It

8. You Are Desperate For a Loan Regardless of the Terms

Unless it is an emergency, such as a medical bill, being in a state of desperation to the extent that you have no regard for the terms of the loan is a major red flag.

If you have a persistent, irrational appetite for debt - it may be a warning sign of financial trouble ahead. Consider practising patience to ensure that you are in the right frame of mind when you take on the loan.

It is important to research and understand the many debt options available to you, and choose the most affordable and convenient option for your financial situation.

Money254 has a dedicated platform where you can compare personal loans available in Kenya on the terms that best suit your needs. Check it out here.

9. You Have a Habit of Misappropriating Loans to Impulse Purchases

Debt is costly because it often comes with administration fees and an interest rate. Thus, it is advisable to take it with a pre-planned investment or utilisation plan.

However, there are borrowers who will have a ‘solid’ plan, but once they receive the cash, they are unable to resist the urge for impulse purchases - which results in the borrowed funds being misappropriated.

Further, taking a loan with a utilisation tool sets in the temptation for impulse consumption for items that set you back with a debt financing obligations for items that you did not need in the first place.

10. You Have No Idea How Much Total Debt You Actually Have

If you have no idea how much debt you already have, that is a warning sign that you are not ready to apply for a new loan.

Poor accountability of existing liabilities is a sign that you have not been checking out from your spending. It could also be that you are already in a debt crisis and you are unwilling or unable to confront the real cause.

Thus, before taking a loan, ensure you have fully audited your current and future income, the existing liabilities, and the relevant costs - which are sometimes hidden.

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Tony Mukere is the branded content lead at Money254. He is a trained journalist with a passion for impactful storytelling. Before joining Money254.co.ke, he worked as an editor at Kenyans.co.ke, and as a reporter at Pulselive.co.ke. Connect with Mukere on Twitter.

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