Despite the quest for financial independence and enjoyable retirement, debts have become part and partcel of our everyday lives. To some individuals and households it is even enviable.

It is also natural nowadays that even students are counting on debt to fulfill their education dreams. Workers are rushing for mortgages, car loans and other personal loans.

These lucrative personal loans account for the biggest percentage of the loan portfolio in Rwanda’s banking market, thanks to banks’ that have created flexibility in retail banking.

And to save ourselves from sleepless nights we tend to rush into repaying off as soon as possible. But is it the best choice given limited income streams. Debt repayment is not a choice, but an obligation that one must respect, however repaying before the loan matures is optional. 

When you choose to pay off debts hurriedly, interest expenses are eliminated but its worth noting that you are sacrificing income that you could have earned if you had invested the same amount.

The benefit though, is that once you pay off your debt in time, you begin to earn interest income on the money you would have spent each month on debt payments. Also interest on debt is supposed to be tax deductible.

But two aspects need critical consideration; One, you need to always put  the rate of after-tax interest you are paying on your debt and the after-tax rate of return you expect to earn on your investments.

If you can earn a higher after-tax return on your investments than the after-tax interest rate expense on your debt, you should invest. Otherwise, you should pay off your balance in time.

But investments will grow overtime and can also help you offset some of your debt burdens during hard times.

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