Debt Management

 

Introduction

Borrowing money has always been part of human society. From informal lending among family and friends to complex banking systems offering credit cards, loans, and mortgages, debt has played a significant role in shaping lives, businesses, and economies. For young people aged 18–35, understanding debt is crucial. This is the stage where many are pursuing higher education, starting their first jobs, running small businesses, or trying to become financially independent.

Unfortunately, debt can either be a tool that accelerates progress or a trap that leads to years of financial struggle.

This module equips you with the knowledge and tools to borrow responsibly, manage debt effectively, and teach others in schools and communities how to avoid debt traps. By the end, you will not only understand how debt works but also be able to guide others toward financial responsibility.

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1. Understanding Borrowing and Debt

What is Borrowing?
Borrowing is when you receive money, goods, or services from someone else (a lender) with the promise to pay back later, often with additional charges known as interest. Borrowing can be formal (from banks, credit unions, or fintech companies) or informal (from family, friends, or moneylenders).

What is Debt?
Debt is the amount of money you owe after borrowing. It is the financial obligation you must settle with the lender within the agreed period. Debt becomes a burden when repayments are not well planned or when borrowing is excessive.

Why Do People Borrow?

• To pay for education (student loans)
• To start or expand a business
• To buy assets (like a car or home)
• To cover emergencies
• To meet day-to-day expenses when income is not enough

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2. Good Debt vs. Bad Debt

Not all debt is harmful. Understanding the difference helps you make informed borrowing decisions.

Good Debt
This is debt that has the potential to increase your wealth or improve your life in the long term. Examples include:

• Education loans: Borrowing to pay for studies that increase your earning potential.
• Business loans: Borrowing to start or expand a business that generates income.
• Mortgage: Borrowing to buy a home that can appreciate in value over time.

Good debt is usually linked to assets or investments.

Bad Debt
This is debt taken for things that lose value quickly or don’t generate future income. Examples include:

• Credit card debt for shopping, luxury items, or entertainment.
• Loans for expensive holidays.
• Payday loans with extremely high interest rates.

Bad debt often leaves you financially drained because it creates no future returns.

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3. Types of Borrowing Young People Encounter

Formal Borrowing

1. Bank loans - for education, business, or personal use.
2. Credit cards – allow borrowing instantly but carry high interest rates if balances are not paid on time.
3. Microfinance loans – small loans to support small businesses.
4. Digital loans (fintech apps) – quick access but often with high interest rates.

Informal Borrowing

1. Family and friends – usually without interest, but can strain relationships.
2. Moneylenders or loan sharks – easy access but very high interest and risk of harassment.
3. Community groups/cooperatives (savings groups, SACCOs) – borrowing against group savings.

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4. The Dangers of Debt Traps

A debt trap occurs when a person borrows repeatedly to repay old loans, creating a cycle of endless borrowing. Many young people fall into debt traps because of poor planning, lack of income, or impulsive borrowing.

Signs You Are in a Debt Trap:

• Borrowing from one source to repay another.
• Paying only the interest and never reducing the actual loan.
• Constant anxiety about debt.
• No savings because all income goes into debt repayment.

Real-Life Example:
A young graduate takes a quick loan from a mobile app to buy a phone. Unable to repay on time, penalties accumulate. To cover this, they borrow from another app. Within months, the debt grows bigger than their salary, leading to stress and financial ruin.
Lesson: Borrow only when necessary and with a clear repayment plan.

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5. Principles of Responsible Borrowing

1. Borrow for needs, not wants. Take loans only when they will improve your life or income.
2. Understand the terms. Read the interest rate, repayment schedule, and penalties before borrowing.
3. Borrow within your capacity. Never take loans that exceed 30–40% of your monthly income.
4. Have a repayment plan. Know exactly how you will repay before you borrow.
5. Avoid impulsive borrowing. Don’t let peer pressure or flashy ads push you into debt.

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6. Strategies for Debt Management

Managing debt is about staying in control and avoiding unnecessary stress.

Step 1: Know Your Debt Situation

• Write down all your debts: amounts, interest rates, repayment deadlines.
• Identify which debts are urgent and which are long-term.

Step 2: Prioritize Payments

• Pay off high-interest debts first (like credit cards or payday loans).
• Always pay at least the minimum on all debts to avoid penalties.

Step 3: Budget for Debt Repayment

• Dedicate a portion of your income to paying debt before spending on luxuries.
• Use the 50/30/20 rule: 50% needs, 30% wants, 20% savings/debt repayment.

Step 4: Negotiate with Lenders

• If you struggle, talk to your lender. Many banks allow restructuring or reduced interest.

Step 5: Avoid Taking More Debt

• Do not borrow again while trying to repay existing debt unless it reduces your interest burden.

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7. Tools and Techniques to Get Out of Debt

Snowball Method:
Pay off the smallest debts first to gain confidence. Once one is cleared, move to the next until all are gone.

Avalanche Method:
Focus on the debt with the highest interest rate first. This saves you more money in the long run.

Debt Consolidation:
Combine multiple debts into one loan with a lower interest rate.

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8. The Role of Credit Scores

A credit score is a rating that shows how trustworthy you are in repaying borrowed money.

• Good credit score: Easier access to loans with lower interest.
• Bad credit score: Denied loans or higher borrowing costs.

Young people should build good credit by:

• Paying bills and loans on time.
• Avoiding defaults.
• Keeping debt within manageable limits.

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9. Teaching Debt Management in Schools (KAFI Clubs)

As young leaders, you will be role models in teaching students how to avoid debt problems.

Activities:

• Role-play: Act out a scenario of irresponsible borrowing and show consequences.
• Games/simulations: Demonstrate how debt grows when unpaid using math exercises.
• Storytelling: Share real stories of debt traps and success stories.
• Savings challenges: Encourage saving to reduce dependency on borrowing.

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10. Case Studies of Young Entrepreneurs and Borrowing

Case 1: Good Debt
Mary, 24, borrowed a small loan to buy tailoring equipment. She repaid on time, expanded her business, and now employs two people.

Case 2: Bad Debt
John, 22, borrowed money from loan apps to party and buy gadgets. Unable to repay, he was blacklisted by a credit bureau, ruining future opportunities.
Lesson: Borrowing can build or destroy your future.

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11. Global Perspectives on Borrowing

• Africa: Mobile loans are popular but often high-interest.
• Asia: Many young people borrow to start small businesses via microfinance.
• Europe/North America: Credit cards and student loans dominate youth debt.
• Latin America: Community lending groups and informal borrowing are common.

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12. Practical Exercises

1. Debt Diary Exercise: Write down current debts, repayment amounts, and timelines.
2. Role-Play: Simulate “lender” and “borrower” roles to show debt consequences.
3. Repayment Plan Assignment: Create a plan for repaying a $500 loan.

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Conclusion

Debt can be a powerful tool or a destructive force. For young people aged 18–35, understanding how to borrow responsibly and manage debt effectively is essential for building a strong financial foundation.

As future financial literacy leaders, you must not only practice these principles but also teach others how to avoid debt traps, use good debt wisely, and achieve financial independence.

Debt management is not just about money, it’s about freedom, peace of mind, and empowerment to pursue your dreams.

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