Skip to main content

Interest Rates Going Up? What it Means for You

Borrowing is perhaps the greatest form of leverage in both personal and business wealth building. Indeed, it has been proven that you can never become substantially rich using your own money. However, borrowing has become a pricey affair as witnessed with the interest rate revisions in our banking sector.

In this high interest rate environment, the mind goes into overdrive and we begin to seek ways to cope with heavier repayment obligations. It is however critical that we understand the reasons behind the current environment.

Why do interest rates go up? Interest rates (or simply put, the cost of money) are affected by many factors, the most common being:

Inflation rate: For example, Kenya's inflation rate shot up to above 20% towards the end of 2011. Because money loses its purchasing power when inflation is high, those holding money will normally demand higher compensation to protect themselves against such loss.

Supply and Demand of Money: When supply of money is high (liquidity), interest rates tend to go down as those holding money seek to tempt those in need of money to borrow. However, if the demand for money is high and the supply side of money is less, then those holding money may demand a higher return because the competition for money is high.

Monetary Policy actions: If the Central Bank reduces interest rates for treasury bills, then banks (the highest investors in treasury bills) will prefer to lend their money to borrowers instead of investing in treasury bills, thus forcing lending rates down. However, if interest rates for treasury bills rate go up, then banks will rather invest in treasury bills than lend, but when they do lend, they will demand higher interest rates.

On the other hand, the Central Bank may opt to print currency to increase the supply of money to the market, thus causing interest rates to drop. However, printing money has other, not-so-welcome ripple effects in the economy.

What to do when the interest rates go up?

Negotiate: With the onset of credit referencing, a good credit history can actually work for you. You should be able to somewhat negotiate your loans and even repayments to suit your needs. Some borrowers usually make it a habit of evaluating their loans every year to ensure that they are still getting a good deal.

Also, prioritise your debts. You might find yourself with many loans and the repayments look daunting. Best thing would be to prioritise according to the interest obligation. Think carefully about discretionary loans, especially round short term borrowing needs.

Explore alternative sources of funding: Look for alternative sources of money such as your Co-operative Sacco, your investment group, or even your family. You could even raise money by disposing of some of your assets.

Borrowing only if you must: However, if you have explored all of the above and still need to borrow, go to your bank manager and ask for a loan. Try to repay this loan over a longer period to reduce the monthly instalment so you don't feel so much 'heat'.

What to do if you already have a loan?

Restructure the loan: If your monthly loan repayment was Ksh30,000 ($360) when the rate was 15%, it may have changed to around Ksh40,000 ($480) when the rate increased to 25%. An additional Ksh10,000 ($120) can wreak havoc on your budget. Go to your bank manager and ask to restructure the loan over alonger period or change the loan type. Doing this could reduce your loan repayment to Ksh 35,000 ($420) - a monthly saving of Ksh 5,000 ($60).

Pay off the loan: Paying off the loan as quickly as you can is the best way of saving you money and hassle. You save in two ways: 1) the interest payments that you would have continued to pay will now be your money. 2) The money saved is now available for investment and if you can get higher rates of return, you'll enhance your chances of building wealth.

Do nothing and suffer: You may also opt to do nothing and continue to suffer the 'heat' of the increased interest rates. However, you can lower the 'heat' by taking on contracts or start an income-generating activity that covers the increase in rates. Always taking into account the three buckets of success


Popular posts from this blog

How to Verify Your Land Title Deed is Genuine

Cases of forged title deeds are on the increase. Therefore, people are losing money to con men as they are taken advantage of due to their ignorance regarding land transaction matters. While thinking of owning land, it is vital to be aware of how you can verify a title deed before investing your hard earned cash.

As you plan to commit your money to buy and construct your dream home, verify that, the seller is the genuine owner, the land exists and is free from restrictions. Also be sure that you are not buying land on a road or railway reserve and above all, that the title deed is genuine.

How farmers can double their bean yield production

"As Jack slept, the beans germinated in the soil, and by morning a big beanstalk grew in their place. When Jack saw the great beanstalk, he immediately decided to climb..." This is a classic scenario of 'Jack and the Beanstalk' fairy tale. The same is true for Kenya's bean variety that climbs and spreads on sticks producing double the yield of local varieties.

Due to subdivision of land in Kenya, farmers are not able to produce enough beans to feed the 38.6 million people living in Kenya.This is mainly due to shrinking land sizes. This is the reason why high yielding varieties of beans that only need a small area to grow has been developed. These new varieties of beans require support with stakes (sticks) to climb on when they are growing.

The beans can grow up to a height of 3.5 meters. The long stems of this variety of beans enable it to produce more pods as compared to the normal bean varieties (bush bean).   With good management climbing beans can produce u…

Herbal Plants used for Alternative Medicine with no side effect

In a sad note, most indigenous informants keep herbal knowledge, especially the actual preparation methods, strictly secret. Luckily, an aged medicine man from Gatundu in Central Kenya, whose great knowledge of medicinal plants facilitated the write-up of this article.
In part one of this article, plants are grouped according to their medicinal use. According to the aged medicine man, simply boil the leaves, roots or the bark; add honey or milk or soup to sweeten the concoction. He recommends taking a glass in the morning and in the evening for preventive measures. 
He cautions on their medicinal uses which should be considered as neither preparation methods nor dosage prescription are provided. This is a topic that would require much more time and I have decided to leave it for part two of this article.
Best Herbal Plants for alternative Medicine with no side effects

I have grouped their medicinal uses in three parts which are,       Alternative medicine for preventive measuresHerbal …