See the best products from money254
Personal Loans

Full Guide: All You Need to Know About Personal Loans in Kenya

Kelvin Kiogora
August 26, 2021

Guide Overview and Key Takeaways

  • A personal loan is money borrowed from a financial or lending institution to be used for personal reasons. While some personal loans are provided for specific use cases, many have no restrictions.
  • Your access to personal loans, as well as the amount of money you can get through a personal loan usually depends on your income, as well as your creditworthiness.
  • Used in the right way, personal loans allow you to access funds that can bring you closer to your financial goals.
  • Personal loans can either be secured or unsecured.
  • In Kenya, you can get a personal loan from commercial banks, microfinance institutions, SACCOs, digital lenders, your chama and other informal sources such as your shopkeeper family and friends.

What Is A Personal Loan?

A personal loan refers to money borrowed from a financial or lending institution to be used for personal reasons. The key factor that differentiates most personal loans from other kinds of loans is that you’re free to use the money as you please.

FOR YOU>>Find and Compare the Best Personal Loans in Kenya Here

For instance, when you get an auto loan, you can only spend the money to buy a car. Similarly, if you get a home loan, you are only supposed to use the money to buy a home. With many personal loans, however, there are no restrictions on how to use the money.

Aside from the lack of restrictions on how to use the money, personal loans also have relatively short repayment periods and depending on the lender, they could have fixed interest rates. Typical repayment periods range from six months to four years but there are personal loans that have a repayment period of up to seven years.

Your access to personal loans, as well as the amount of money you can get through a personal loan usually depends on your income, as well as your creditworthiness. Once you get a personal loan, you’ll be required to pay back the loan plus the interest in periodic instalments as agreed with your lender. In most cases, the monthly payments start 30 days after you’re granted the loan.

The Difference Between A Personal Loan And A Revolving Credit Line

Just like personal loans, revolving lines of credit, such as credit cards, do not have any restrictions on how you can use the money. So, what is the difference between the two?

The key difference between a personal loan and a revolving credit line is that the revolving credit line gives you continuous access to the funds for as long as the credit line is active.

With a personal loan, you receive a lump sum of money. After using the money, the only way to get access to more money is to apply for another personal loan.

With a revolving credit line, on the other hand, you are given a specified credit limit. You can access this credit, either in full or in part, as many times as you like, provided you don’t go over the limit. Paying down your revolving line of credit gives you access to more credit. This is different from a personal loan, where paying down the loan doesn’t give you access to more funds.

For instance, let’s assume you have a revolving credit line with a credit limit of Ksh500,000. You then use Ksh200,000 from this revolving credit line to stock up your business, and use another Ksh100,000 as down payment for a plot of land you’re acquiring.

At this point, you’ve used up Ksh300,000 from your Ksh500,000 credit limit, meaning you still have access to Ksh200,000. If you then go ahead and pay down Ksh150,000, you’ll now have access to Ksh350,000 in your revolving credit line.

You can keep doing this as many times as you want as long as your revolving credit line is active. This is not possible with a personal loan. With the personal loan, you get a fixed sum of money in a one-time arrangement, which you then have to pay back in regular instalments until the whole amount has been paid back.

FOR YOU>>Find and Compare the Best Personal Loans in Kenya Here

However, it is very important to note that interest rates and late repayments for a revolving line of credit work differently as compared to personal loans. You must carefully read the terms of a revolving credit line to fully understand the implications before committing. That is why due diligence is absolutely necessary when deciding between a personal loan and a revolving credit line.

Are Personal Loans Bad?

There’s a lot of negative attitude towards personal loans among Kenyans, which can be attributed to the several cases of people who have had their homes and property auctioned after failure to repay their personal loans. So, are personal loans bad?

No. Personal loans are neither good or bad. Used in the right way, personal loans allow you to access funds that can bring you closer to your financial goals.

What you need to do to be safe is being careful when taking a personal loan, following the right steps to ensure you get the best personal loan with the best terms (we’ll discuss how to evaluate a personal loan later in this guide), and, importantly, using the loan for the right reasons.

When To Take A Personal Loan

Personal loans are a perfectly legitimate source of funding that can be helpful for a number of goals. Many personal loans will not have restrictions on what use you put the money to - which depending on how you look at it, can be an advantage or disadvantage.

That said, there are some good reasons for taking a personal loan, as well as some wrong reasons for taking a personal loan. Taking a personal loan for the wrong reasons can easily lead to unintended financial consequences, which is why you need to be very careful when taking a personal loan.

Some good reasons why you could take a personal loan include:

  • Investing in yourself: This means taking a personal loan to do something that is beneficial for you, such as paying for an online course to learn new skills or starting a business.
  • Buying an asset: This is where you take a personal loan to buy something that generates income for you. For instance, you can take a personal loan and use it to buy an appreciating asset such as a piece of land - a favorite for Kenyans.
  • Emergencies: Personal loans can also be a great way to raise money to cover emergencies. For instance, if you find yourself in a medical emergency, taking a personal loan can help you raise money to cover the medical bills for you or a loved one.
  • Debt consolidation: If you have a high interest loan, you can get a lower interest personal loan and use the money to pay-off the high interest loan you have been servicing. Doing so allows you to get out of debt faster because of the lower interest rates.

Some wrong reasons for taking a personal loan include:

  • Keeping up with your expenses: If your expenses exceed your income, taking a personal loan to meet your expenses is generally considered a not-so-good decision, since you will most likely be digging yourself into a financial hole. It is likely that you may end up borrowing month-on-month to pay for your regular expenses. If you find yourself doing this, then the next question on your mind should be how you get yourself out of it, rather than cyclic borrowing that, in reality, takes more money out of your pocket.
  • Buying something you can’t afford: Taking a loan to buy something you cannot afford is generally a bad idea - unless the acquisition will add more more money to your pocket either directly or indirectly. Aside from tying you into debt, doing so also raises the cost of whatever you’re buying due to the interest on the debt. A better idea is to save up money until you can afford what you want - especially if this is a vanity purchase.
  • Taking a vacation: If you don’t have money to pay for a vacation, it is better to save up gradually until you can afford the vacation, or change your vacation destination to somewhere you can afford. By taking a personal loan to finance a vacation, you’re saddling yourself with debt for something that is not an absolute necessity.

Types Of Personal Loans

There are two major categories of personal loans in Kenya – unsecured and secured personal loans.

Unsecured Personal Loans

Unsecured personal loans are personal loans that do not require you to provide collateral to secure the loan. Collateral refers to an asset that you avail to a financial or lending institution to act as security for the loan in case of non-payment.

With an unsecured personal loan, the amount of funds you can access is largely dependent on your income.

Since unsecured loans come with a higher risk of non-payment for lending institutions, these loans usually attract higher interest rates.

Under the unsecured personal loans category, we have some sub categories of personal loans, such as…

Short-Term Loans

These are unsecured personal loans that have very short repayment periods, usually between 1 and 60 days. These loans are perfect for covering emergencies as you wait for your next paycheck.

Short-term unsecured loans are relatively easy to access, they do not require lots of documentation, and they have fast approval times (note that app-based loan providers may be scrapping personal data off your device as an alternative to formal paper documentation) . The trade off, however, is that they only give access to relatively low amounts of money, while their interest rates and late fees are significantly high.

Check-Off Loans

These are unsecured loans that are accessible to employees whose employers have an MOU with the lending institution. With these loans, your loan repayment is taken off your paycheque and sent directly to the lending institution by your employer.

Due to the MOU between the lending institution and your employer, these loans usually have very fast approval times, and it is possible to negotiate for better payment terms.

Non Check-Off Loans

These are unsecured personal loans that are given on the basis of your salary or income. Unlike check-off loans, however, there is no MOU between your employer and the lending institution, and therefore, the loan payments are not deducted directly from your paycheque. Non check-off loans may give you access to larger amounts and could be approved a little faster. For this to work, you generally have to have the necessary funds in an account with the lending bank or Sacco et. - such as having your salary deposited in the lender’s bank - otherwise you would need to place a standing order (which may attract charges for inter-bank transfers and for all accounts if the deposit date is late) on your salary account.

Salary Advance Loans

This is an unsecured personal loan facility that allows you to access your salary, or a portion of it before payday. To be eligible for a salary advance loan, you need to have a salary account with the lending institution. Salary advance loans usually have very fast approval times and subsidized interest rates.

FOR YOU>>Find and Compare the Best Personal Loans in Kenya Here

Secured Personal Loans

With secured personal loans, you’ll be required to provide an asset to act as security for the loan. If you default on the loan, the lender can seize the asset and sell it to cover your remaining loan balance.

Examples of assets that you can provide as collateral for a secured personal loan include motor vehicles, homes, buildings and parcels of land.

Under the Movable Property Security Rights Act of 2017, movable assets like livestock, machinery, crops, household items like electronics and furniture, as well as intangible assets like intellectual property and performance contracts can also be used as collateral for personal loans.

Under the secured personal loans category, we have some sub categories, such as…

Logbook Loans

These are personal loans that are secured with your car as collateral. When you take a logbook loan, you will still retain use of your car while repaying the loan, but the lending institution will hold onto your logbook, hence the name.

In case you default on the loan, the lending institution has the right to take possession of your car and sell it to offset your loan balance.

Asset Loans

These are personal loans that allow you to borrow against your personal assets. In this case, the lending institution holds the rights to your personal assets until you clear the loan. Examples of assets that you can use as collateral for asset loans include buildings, land, and equipment.

Important Terms And Considerations When Taking A Personal Loan

All personal loans are not equal. Before making the decision to apply for a specific personal loan, there are several different characters that you need to take into consideration to ensure you’re getting a good deal. These include:

Eligibility Requirements

Before making the decision to take a loan, you need to know if you are eligible for the particular loan product you are interested in. Some factors that could impact your eligibility include:

  • Minimum income: Do you need to have a certain minimum monthly income to be eligible for the loan? Does your income allow you to qualify for the loan?
  • Salary transfer: Some lenders will require you to transfer your salary account to their institution in order to be eligible for a personal loan. Is this something you’re willing to do?
  • History with the institution: Some lending institutions require loan applicants to have had an active account with them for a certain period of time before you can become eligible for loan facilities. You’ll need to check if this applies in your case to know if you qualify for the loan.
  • Credit History - Lenders will always factor in how well you have been repaying previous debts. Many lenders (not all) may also check if you have been listed at Credit Reference Bureaus (CRBs). Depending on the lender, this could have an implication on the amount you are eligible for and the interest rate charged.

Interest And Fees

The interest and other fees charged by the lending institution will affect the total cost of your loan, and therefore, you need to take all these fees into consideration before taking a loan. This will help you determine how expensive the loan is.

Here are the different fees you need to look at before applying for a loan:

  • Interest rate: The interest rate will either be a flat fee, or represented as an annual percentage rate (APR), depending on whether you are borrowing from a regulated entity, or from a digital lender. Note that some commercial banks also offer flat rates fees instead of APRs.
  • Processing fee: This is a one-time, non-refundable fee that is charged by the lending institution for underwriting and processing your loan. Some lenders will charge this upfront, meaning you have to pay the processing fees from your own pocket, while others deduct the charge from the loan amount.
  • Credit insurance: Most lenders will also charge you some money that will go towards purchasing an insurance policy for your loan. With an insurance cover for the loan, the lending institution will still get paid even if you are unable to pay back the loan due to circumstances like unemployment, disability, or death.
  • Late fees: This is the penalty charged for late payments. When looking at the late fees, take into consideration not only the amount charged, but also the structure of the late fees. Are the late fees charged on a daily or monthly rate?
  • Excise Duty: All regulated financial entities are required to charge a 20% excise duty on the loan processing/negotiation fee which is deducted upfront.

FOR YOU>>Find and Compare the Best Personal Loans in Kenya Here

Product Details

This refers to the details of the specific loan facility you are considering. Some things to consider here include:

  • Minimum and maximum amount: This is the minimum and maximum amount of money that you are eligible to access with that loan facility. Before getting the loan, make sure that the amount you are eligible for is enough to cover the needs that drove you to take the loan.
  • Minimum and maximum tenure: This refers to the amount of time given for you to repay the loan. Note, however, longer repayment periods are not always better. While a long repayment period translates to lower instalments, it also means you’ll also have to pay a higher cumulative interest amount.
  • Application approval time: This refers to the time it takes for the lender to process and approve your loan application. Ideally, you should go for loan facilities with faster approval times. However, this will ultimately depend on the reason you are applying for the loan.
  • Disbursement method: This refers to how the lender will proceed the loan amount to you. Some lenders will require you to open an account with them, while others will disburse the money to already existing accounts with other institutions. Here, you need to think about disbursement methods that offer the most convenience for you.

Repayment Details

The repayment details take into consideration the lenders requirements when it comes to making payments, as well as available options that could make repayment more convenient for you. Some things to look at here include:

  • Repayment frequency: How often are you supposed to make the payments? While most personal loans use monthly instalments, there are some that require you to make weekly payments, while others allow you to make a lump sum payment at any time within the life of the loan. You also need to consider if there are any penalties if you miss an instalment.
  • Early repayment: What happens if you clear the loan before the agreed repayment period? Some lenders will give you a discount for clearing your loan early, while others could charge you an early payment penalty because they are going to be losing out on interest.
  • Repayment method: Which options does the lender give you for making your loan payments? Will they auto-deduct the monthly instalment from your account every month? Do they allow you to make the payment via M-pesa? Can you make the payment via cheque? Here, you want to go with a lender who has a payment method that is convenient for you.

Institutions Offering Personal Loans In Kenya

In Kenya, there are 4 main types of financial institutions that offer personal loans. These are:

  • Commercial banks: Commercial banks are large financial institutions regulated by the Banking Act and that cater to the general market. Commercial banks typically have very stringent loan approval requirements. Some commercial banks only offer secured personal loans but many others offer unsecured personal loans too.
  • Microfinance Banks(MFBs): These differ from MFIs in the fact that they are licensed and regulated by the Central Bank of Kenya (CBK), are deposit-taking, offer savings and funds transfer services.
  • SACCOs: Savings and Credit Cooperatives, better known as SACCOs are cooperative societies that advance loans to their members based on their savings. SACCOs have very low approval requirements, and their interest rates are among the lowest you can get. Most SACCOs offer unsecured loans provided you have some savings and guarantors, though they’ll sometimes require collateral for big loans.
  • Credit-Only Institutions (Digital lenders and Non-deposit taking financial institutions) : Many digital lenders have come up in Kenya offering relatively small, unsecured personal loans that are sent directly to your phone. While these digital lenders have the lowest approval requirements, their interest rates are among the highest, due to the very high risk of default. Most digital lenders also offer very short repayment periods. It’s also good to note that most of these digital lenders are unregulated by the government.
  • Microfinance institutions (MFIs): These also fall under this category. They offer services that are very similar to those offered by banks, but they mostly cater to niche markets. The loan approval requirements of microfinance banks are less stringent compared to those of commercial banks.

Steps To Go Through When Choosing A Personal Loan

Choosing a personal loan is not as simple as applying for the first personal loan you come across. To ensure you are getting the best personal loan for your needs, here are the steps you need to follow when choosing a personal loan.

1. Decide What You Need The Loan For And How Quickly You Need It

The first thing you need to do is to decide why you need to take a loan. Do you have an emergency? Do you want to start a business? Do you want to pay for college? Remember, as we saw earlier, there are some good and bad reasons for taking a personal loan. Before proceeding, you need to make sure you’re taking the personal loan for a good reason.

Next, you also need to determine how quickly you need the loan. For instance, if you have an emergency, you definitely need the money as soon as possible, therefore, you should go for loans that have fast approval times.

If, on the other hand, you intend to use the funds to start a business, waiting for a week or two before getting approved for the loan is unlikely to cause any harm.

2. Search For The Best Options

Once you’ve figured out why you need a personal loan and how quickly you need it, the next thing is to search for the best personal loan products for your needs. For this, you can use the Money254 Loan Finder to find the best option.

3. Compare The Best Options Based On What Matters To You

At this point, you have several good personal loan options, but you need to make a decision on the specific personal loan product that is best for you. Here, you should look at the terms and considerations we covered earlier in the article, such as interests and fees, disbursement details, loan tenure, repayment details, eligibility requirements, and so on.

When looking at the interest charged on the loan, it is good to note that the interest on some loans is calculated at an annual percentage rate, while others calculate the interest rate on declining balance.

Interest on declining balance means that, instead of paying the same interest throughout the life of your loan, the interest will reduce every month as you pay off your loan premium. While declining balance rates usually attract higher interest rates than fixed interest rates, they end up being cheaper in the long run.

4. Apply For The Product

Once you’ve identified the best personal loan product for you, you can then go ahead and make your application. The application process will depend on the institution you are borrowing from.

For commercial banks, microfinance institutions and SACCOs, you’ll typically be required to make your application by filling and submitting paper documents. However, there are some banks, microfinance institutions, and SACCOs that allow you to submit your application digitally.

For digital lenders, the applications are usually submitted digitally, either using the lender’s mobile app, or through USSD.

Potential Risks Of Personal Loans

While personal loans can go a long way in helping you achieve your financial goals and change your life, they also come with some risks that could be very costly for you. Some of the potential risks of personal loans include:

Failure To Make Your Payments

When taking a loan, everyone has a plan on how they are going to pay back the loan. Unfortunately, things don’t always work according to plan.

For instance, let’s say you took a loan to start a business, with the hope that some of the revenue from the business would go towards paying back the loan. However, due to some unforeseen circumstances, such as the COVID pandemic, you are forced to shut down the business, making it impossible for you to pay back the loan.

If you fail to make your payments, this can have severe consequences for you. You may get listed with the Credit Reference Bureau (CRB), you could get sued, and in the case of a secured personal loan, you could end up losing your assets, such as a house or a parcel of land.

Interfering With Your Other Goals

Taking a personal loan means that part of your income will have to go towards servicing the loan. This could make it impossible for you to pursue your other financial goals, such as saving money to purchase a home, or saving for retirement.

This is why it is very important to consider whether it is absolutely necessary for you to take a personal loan. If you can take care of your needs without taking on debt, this is often your best option.

FOR YOU>>Find and Compare the Best Personal Loans in Kenya Here

Raising Your Debt-To-Income Ratio

Taking a personal loan raises your debt-to-income ratio, which is the ratio of your income that goes towards servicing debt. A high debt-to-income ratio affects your ability to borrow in future when you really need it.

For instance, let’s say you took a personal loan to buy a car that you really don’t need. A year later, you come across a good deal on a home, and you decide to take a mortgage to purchase the home. However, if the repayments on the personal loan you took to purchase a car are too high, your debt-to-income ratio could be too high for you to qualify for a mortgage.

In this case, taking an unnecessary personal loan to purchase a liability (the car) makes you ineligible for a mortgage to purchase an asset (a home).

Wrapping Up

Unlike other loan types, a personal loan refers to credit taken for, as implied, personal reasons. Your lender may typically ask you to give the reasons for taking the loan, but the reasons you give are unlikely to prevent you from given the loan. Some personal loans will however have restrictions on what that money can be used for.

Nevertheless, lenders will still consider factors such as your credit history, and credit score when deciding whether to approve your loan request or not.

Some reasons people have for taking personal loans include; emergencies, debt consolidation, home repairs or improvements, large purchases, major life milestones such as weddings, child-related expenses as well funerals.

It is of utmost to evaluate your reasons for taking a personal loan and determine if indeed the credit you are taking is adding value to your life, such as helping you cross a major hurdle or, more importantly, earning you extra income.

What counts as value to you may not count as value to the next person - so it is extremely personal - however, you have to bear in mind you will have to repay.

Since personal loans are offered by a majority of lending institutions in Kenya, it is important to compare the choices available for you to get the best deal. ,

Factors to consider include; the maximum and minimum amount you are eligible for, minimum and maximum tenure (repayment period), application approval time and disbursement method. You should consider if an unsecured or secured loan type is what works best for you.

Used in the right way, personal loans allow you to access funds that can bring you closer to your financial goals.


The information provided in this guide is intended for information or educational purposes only. Money254 is not a financial institution, insurance provider or financial adviser and is not liable for any decisions any individual makes based on the information provided on the website.  Please refer to our terms and conditions and privacy policy before using this website.

Kelvin is a top-notch writer whose passion is to help businesses maximize their reach and conversion through excellent and engaging content. He has the uncanny ability to make the most complex subject matter simple and easy to understand. You can find Kelvin on Linkedin.

Explore All Products On Money254

Money 254 is a new platform focused on helping you make more out of the money you have. We've created a simple, fast and secure way to find and compare financial products that best match your needs. All of the information shown is from products available at established financial institutions that our team of experts has tirelessly collected. Instantly search loan products from established providers in Kenya and compare on the terms that matter most to you.

Explore All Products On Money254

Sign up for our newsletter and get weekly money tips to your inbox.

Get updates from the Money254 team on financial news and new Money254 features.