ILLUSTRATIVE SIMPLE EXAMPLE OF HOW MR A AND MR B USED THEIR LOANS (Please read this to understand our debt problem)
Borrowing money is not a bad thing if you use the money correctly, most people that became wealthy financed their business through loans.
Let’s give you a practical example ;
Mr A and Mr B both work for the same company in the same capacity. They both have a salary of K10,000.
Mr A goes to FNB Bank and gets a loan of K200,000, he negotiates an interest rate of 25% and a repayment period of 7 years.
Mr B goes to ZANACO and also gets a loan of K200,000, he gets a higher interest rate of 35% and a repayment period of only 5 years.
They now both have K200,000 in the bank right?
Mr A uses the K200,000 to buy a hammer mill and a Bus.
He uses both for business, he charges people to use the hammer mill and charges fees for the use of the bus.
Every month he makes K10,000 profit from his business.
From this profit, he takes K5000 as monthly loan repayment to the bank, K2000 for personal consumption and K3000 remains in the business, over time he buys a second hammer mill and another bus and his business expands, he now makes K20,000 per month from his business, and soon he clears his loan with FNB with no problems and never having to use his salary for loan repayments.
Eventually he builds some flats, put them on rent and buys a nice car.
Let’s now talk about Mr B
When Mr B gets his K200,000 loan, he buys a Benz for K120,000, he goes on holiday to Cape Town for K40,000 and spends the remaining K40,000 on household furniture, partying and expensive outings.
He now starts making his loan repayments of K6000 from his K10,000 salary to the bank for loan repayments. That leaves him now with only K4000 to pay rent, school fees for his children and other expenses. After 8 months he fails to make his loan repayments and Zanaco comes after him, they grab the Benz, grab his furniture and take him to court, they obtain an order to get his salary until the loan is paid.
The court declares Mr B bankrupt and extreme poverty strikes his home.
In trying to stay afloat, Mr B starts borrowing more and more money from unscrupulous lenders getting himself in more problems.
WHAT’S THE MORAL OF THE LESSON?
1: Do not borrow for consumption, borrow for investment.
When you borrow, have a plan, invest the money in income generating activities, those activities should be able to generate enough profit for you to pay the loan, make a profit and not use your salary. Your salary should only be a means for you to obtain the loan.
2: When you borrow, negotiate good interest rates and a reasonable repayment period.
3: Do not waste or steal borrowed money.
Paul Kagame of Rwanda is Mr A, he borrowed for good reason, invested the money wisely, no pilferage, the investments paid off, he paid back the loans and the economy expanded.
ECL is Mr B, he borrowed for consumption, buying JETS, endless foreign trips abroad, fire tenders, Corruption and useless things that don’t generate any income. Alot of the money was stolen.
As a result, the loans had to be paid back from taxpayers money, reducing financial budgetary allocation for health and education, hence no medicines in hospitals.
As the debts mounted he went to the Chinese and borrowed more and more money until the country became bankrupt.
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