Mr Mugisha owns a retailer shop in one of the suburbs of Kampala and has four children ranging from 11 to 17 years all in secondary school. His wife, a stay-at-home mother, helps with house chores with no stable source of income. But once in a while, she works with the husband at the shop. They have been supporting each other to raise their children.
They identified with a Microfinance institution where they have been saving and borrowing to finance their children’s school fees and increase their stock over a long period of time and they have a good record via paying their loan instalments. At the beginning of year, things were not the same when Mr Mugisha diverted the borrowed money to attend to an emergency. He was informed from the village that his dad was critically ill and needed immediate medical attention. Being the only son who is highly respected by the elders and relatives, pressure was too much on him. He was told the hospitals in the village could not manage the fathers’ condition. To cut the story short, he brought his father to a better health facility where he could easily monitor his health and get the necessary treatment. The father spent two weeks in the hospital. Unfortunately, he died and all hospital bills and burial expenses were met by Mr Mugisha.
It is natural to first attend to an emergency need when you have the money. More often borrowers treat loans as their money and divert it from the primary use of the loan into something that was not planned for. As in the case of Mr Mugisha, the loan helped sort the many unexpected events that befell him. However, he struggled to pay school fees and the loan instalment which has affected his business and family. Some events of life can override our financial positions and if one is not prepared, it can lead to delinquency.
A loan is money that is borrowed and must be paid back, usually with interest and other associated costs such as loan processing costs, insurance fees, stamp duty among others. A loan provides you with a sum of money that might be difficult to obtain when you need it. It enables you to take advantage of business opportunities, respond to emergencies, make home repairs or purchase something you need. But borrowing money can be expensive and carries obligations to repay on time. For these reasons, taking a loan is not the same as using your own money that you may have through wages, business profits or savings. Regardless of the motive of borrowing, you need to bear in mind the associated costs to avoid being over indebted or delinquent.
Good loan, bad loan
We have seen how borrowing money can be a very positive experience. It can help you start or expand a business; it can help you respond to an emergency in your family; it can help you improve your living conditions sooner rather than later. But taking a loan always carries a risk – the risk of not being able to repay. When a loan helps you in these ways, it is usually a good loan. When it ends up costing you money or forcing you to go deeper into debt or default, it is a bad loan.
Keep it in mind that borrowed money is some else’s money which needs to be paid back. This explains why we need to be mindful of how we handle our responsibilities.
Ms Annet Katusiime is a financial literacy trainer and consultant at Be Money Wiser co. Ltd