Guide: How to Prioritize Loan Repayments

Once a loan has been disbursed to a customer, the lending institution has played its part as a financier and trusts that the client will repay the Loan based on the appraisal process and the loan terms and conditions agreed upon. It is now entirely up to the client with a bit of guidance by the financier to make payments as per the repayment terms on the offer letter.

The borrower will need to prioritize their loan repayment to ensure that everything goes smoothly. This sometimes proves to be a challenge if the borrower does not quite understand their financial position. And as the famous quote goes, “If you fail to plan you plan to fail.”

Here are tips to ensure success:

1. Direct the Loan to its intended purpose. 

During the loan application process, every client will have a clear sense for which they are taking the Loan, which most commonly includes working capital, acquiring additional stock, completing building projects, procuring an asset, importing goods, etc. 

Once funds are received, some clients will choose to forget the intended purpose and divert funds to other activities. For example, some have been known to set off to the latest holiday destination that is trending or buy the newest smartphone in the market. This means that the purpose of the Loan will not be met, and therefore the client will struggle to make loan repayments.

 Diversion of funds is one of the main reasons borrowers are unable to honor their payments. Borrowers should therefore ensure the amounts are injected into the business or intended project. Diversion also occurs during loan repayment tenure, where a client may have started well with their repayment schedule but gradually diverts funds either knowingly or unknowingly. In this case, the borrower will need to investigate where things started going wrong.

2. Keep proper records.

Borrowers need to track their progress through proper records: daily, weekly or monthly. Business people must track their finances, and where one has a loan facility to pay, it is critical to track all kinds of expenses and purchases. This way, the borrower will notice when they are going off-track and expending things that are not in the plan and expending way more to allow for their loan repayment. Once this is identified, the borrower needs to try and readjust as fast as possible before it is too late. It is observed that many borrowers also are not able to separate business and personal finances. The two get mixed up, and it then becomes impossible to manage the situation. Therefore, it is advisable that all borrowers kindly separate the two and ensure all the proper records required to enable the efficient execution of loan repayment are well kept.

3. Create a personal repayment plan.

Most financiers operate on a monthly repayment basis. However, none will discourage early repayments. Therefore, the borrower needs to have in mind their lump sum monthly payment amount and identify if that amount may pose a challenge to remit at one go. For borrowers facing this challenging situation, the option of having this broken into a weekly payment may be more comfortable for both the borrower and the business. This should be discussed with the financier to ensure the borrower’s repayment date is also as comfortable as possible. Suppose a borrower can make weekly payments before the due date. In that case, this will also create a good repayment history that will improve the borrower’s credit rating and credibility for future borrowing requests.

4. Live within your means.

Taking the example of a child’s life, it is notable that there are different stages in the mobility process, i.e., sitting, crawling, walking, and finally running. That is the same analogy with business. Every business is at a particular stage in its mobility chart. Borrowers should, therefore, not chase what their friends, family, or other companies are doing. If others are doing big and great things, it is important to know that baby steps were at play at some point. 

These examples should be used as motivation enough to adopt their good practices and in-build these into the business to reach greater heights. It is aptly said that ‘gradual and steady growth is more sustainable than fast and rapid growth. Therefore, if one takes care of their business today, a time will come when the business will take care of them. Most people are currently working for money, but it’s essential to plan and be consistent now that in the future, money works for them

Authored by John Kuria, the Recovery Manager at Springboard Capital Ltd and is very passionate about enabling customers to undertake loan management in a prudent and fruitful manner