Picture this. It’s mid month, you have been managing your finances fairly well but despite this, you are really looking forward to receiving your salary since your account is really close to the red.
You have just enough remaining to take you up to payday, so you are not exactly worried unless something unexpected happens.
And then it does!
It’s a weekend, you are chilling on Saturday mid-morning thinking about all the ways you can make extra money in your free time. Then you get a call from upcountry. Something that could affect your parents’ dairy business needs fixing urgently.
You pause for a moment after the earnest call from your folks as you do the math. What’s left in your bank account can only do one thing. Either you pay to fix the farm equipment, or fund the next two weeks or so of daily expenses. But not both.
It’s not the situation you’d like to be in or wish on anybody else. You remember very well how you set up their dairy farm as a sure way of ushering your elderly parents into some sort of financial independence. Your way of freeing yourself from “black tax.”
You are still repaying that Ksh500k loan you took from a commercial bank for this purpose.
But it’s only a couple of months in and the dairy farm is yet to start making your folks enough money to cover maintenance costs. You have no option but to find a way to get the plan back on track.
Since your bank loan is still being serviced, you figure it is unlikely you will get a top-up loan; at least, not without lots of explanations, paperwork and possible fees.
Then you remember. Why not try a digital loan? Yes. In a situation like what we have described above, it may be a good idea to take a digital loan.
When you are in urgent need of cash and traditional lending options are either unavailable at the moment - many traditional financial institutions do not open on weekends - or you already are servicing debt with your banking partner, considering a digital loan to sort out the problem at hand can be considered a prudent financial decision.
But just because a digital loan is available, and you can qualify for one, it doesn’t mean you have to borrow one - even if you have a clearly legitimate need for money.
Below, let’s discuss some of the factors, given the circumstances above, that make this an financially acceptable decision.
With a regular monthly income, it is quite easy to qualify for a digital loan. But the biggest factor in deciding whether a digital loan is what you need to sort out the situation is your ability to repay.
You may have regular income but you already have it stretched out that repaying a loan may become secondary to all the other expenses your salary needs to pay.
You may have a regular income but you do have an existing loan that takes a significant chunk of your take home pay that may reduce your ability to repay a digital loan.
Generally, if you have a regular income where the amounts can be predicted with a reasonable degree of certainty, then it is quite easy to determine your ability to repay the digital loan.
Examining your ability to repay a digital loan is important because digital loans generally have higher interest rates than traditional loans. So, you want to be able to repay the loan as soon as you can and, if possible, reduce the interest payable or eliminate the costs associated with default.
Digital loans are generally categorised as ‘alternative’ financial products. While this may not necessarily be true, they are in part designed to cater for borrowers unable to secure financing from traditional lenders for whatever reason.
One of the reasons could be there are stringent eligibility requirements that you do not meet such a minimum income threshold, credit history requirements, occupational requirements or simply the fact that you need to have operated an account with a traditional lender for a whale before you can qualify for a loan. Time that you clearly do not have.
In the situation we have described above, you do not have access to more financing from your bank because you already have another loan you are servicing and the procedure to get a top-up loan is either cumbersome, lengthy or costly (processing fees et cetera).
Speed could also be another factor in the sense that while you technically may have access to more financing from your lender, they either do not have digital ways of processing applications or they always require you to visit a branch.
This, coupled with the fact that you have a predictable income that guarantees your ability to repay on time would make choosing a digital loan to pay for an urgent expense a sensible idea.
This is one of the biggest advantages of digital loans; you are in a queue in a supermarket and your mobile banking app is failing, your loved one is stranded and needs quick cash, you need to top up to afford a big purchase, you have a medical emergency etc. Speed is the name of the digital borrowing game.
Now when you are in a situation where the need to have hard cash is much more important than the cost of accessing this credit, and you have the ability to repay, then a digital loan can be a prudent choice.
For example, if you take a digital loan such as LendPlus that charges a daily fee of 2%, you can choose the number of days you want to borrow the loan for and keep the costs low. This is as compared to taking a loan with a fixed tenure where you do not have the option of lowering the cost of the loan in the event you actually can pay early.
Good personal finance management dictates the need to take credit consciously, pair the need for cash with ability to repay and when the chance exists of lowering costs by repaying early, then repaying early or choose the lowest possible tenure.
Why are you taking this digital loan? You have an important project for your folks upcountry that is in a little jam and needs to be rescued to ensure it succeeds.
It is very important to you that the project succeeds since it will eventually reduce the burden on your personal finances once your folks are earning income of their own.
Now, why the decision to take a digital loan to fix this problem with a money-making project is being considered a good decision is the fact that the objective is actually to create value - an income for your folks.
While you may not be buying a chaff cutter for your parents or fixing the malfunctioning diesel-powered generator, it generally is advisable to borrow when you are adding value to your life or preserving the value of an asset/investment.
However you define the tangible benefits of taking a digital loan today, it is advisable that they be aligned more with improving your life and not simply for consumption reasons.
Why? Loans taken for consumption purposes may be a little harder to repay since the value gained, say from a night out with friends, diminishes quite fast with the debt burden actually seeming bigger than it is.
If you are taking a digital loan, before you click “accept” on the loan offer, you want to make sure that this decision is aligned with your financial goals.
You are taking the loan because you are short of cash, you have evaluated all your options - including borrowing interest-free from friends and family - and arrived at the fact that this is the most feasible decision.
You can explain to yourself, or someone else - not justify - why this is a good decision for you given the circumstances, you know the costs involved, you know how you are going to repay it and you generally are confident you will not regret it.
These are the characteristics of a financially aware person - and that’s what you want to be. Not making a decision to get into debt on a whim, but rather subjecting all your financial decisions - big or small - to careful, objective consideration.