How to use Salary loans

Salary loans can be quite useful if well utilised. They are usually unsecured and extended to employees in stable jobs. The amount borrowed is usually proportional to one’s salary.

I took my first salary loan in 2008 and used it to buy shares in Safaricom. I used the second loan to acquire land and pay for my MBA. The third loan I used to acquire more land. The fourth loan was used as part payment for a house. The fifth loan was used to acquire more land. The sixth loan was used to establish a forest project. The seventh loan was used to acquire a truck for our small business.

Somehow I have been lucky to only borrow to acquire assets which appreciate in value or generate income. The challenge is many people use salary loans to pay for a lifestyle (weddings, school fees, cars, etc.) While there is nothing wrong with this, it is not the best use of borrowed funds.

It is important not to over borrow. I fell victim to this and created a lot of stress for myself. Limit monthly repayments to less than 40% of your net salary. Your loan portfolio should not exceed 50% of your net assets. Don’t divert borrowed money for other things. Borrow only what you need and not what your banker is willing to extend. Many high income earners and senior executives over extend themselves by acquiring expensive mortgages to buy big houses and flashy cars. The tables quickly turn when they lose their big jobs.

If possible limit borrowing as much as possible. I consciously decided to get out and stay out of debt. I am currently debt free and it feels very rewarding. I have a sense of freedom in knowing that I don’t owe anyone any money (including my employer and banker). This freedom gives me leverage to explore and pursue other interests without money being the sole motivation.

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