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Things to Consider Before Taking a Personal Loan in Kenya

Kelvin Kiogora
August 26, 2021

Personal loans are a great way to raise money for various needs, such as starting a business, purchasing an asset, consolidating debt, or dealing with an emergency.

However, this doesn’t mean you should walk into the first financial institution you come across and apply for a personal loan.

Taking a personal loan is a significant undertaking that requires a lot of thought and consideration, because getting a loan product that is not the right fit for you can have a potentially negative impact on your finances. For instance, taking a loan with very high interest rates can make the loan too expensive for you and affect your ability to repay it back.

Therefore, it is important to be as informed as you possibly can before making the decision to take a personal loan and compare the available options to make sure you are making the right choice.

Question is, how do you know whether a personal loan product is the right fit for you? Below, let’s check out 8 considerations you need to keep in mind before getting a personal loan.

Eligibility

Lending institutions don’t loan out money to everyone who walks through their doors. They have some criteria that they use to determine whether you qualify for a loan or not.

Before starting your loan application process, you’ll therefore need to check and confirm whether you meet the lenders’ minimum requirements to qualify for the loan. Some of the eligibility requirements for personal loans include:

  • Income verification: Most lenders will require you to provide some documents to prove that you have a stable income and that you meet their minimum monthly income requirements. Having a stable income helps the lender to determine whether you have the ability to pay back the loan. In most cases, you’ll be asked to provide a pay slip if you are employed, or bank statements if you are self-employed.
  • Collateral: If the loan product you are applying for is a secured loan, you’ll need to have an asset that you can use as collateral against the loan.
  • Guarantors: Some lenders will also require you to have a guarantor who agrees to repay back the loan in the event that you are unable to pay the loan. Some institutions, such as SACCOs, could also give you the option to guarantee yourself using your savings.
  • CRB clearance certificate: Some lenders will also require you to provide a clean report from a Credit Reference Bureau showing that you do not currently have a non-performing loan.
  • History with the lender: Some lenders will also base loan eligibility on the length of time you have had an account with them. This requirement locks you out if you did not previously have an account with the lender.

You can easily find out eligibility requirements for personal loans by checking a lender’s website, making a phone call to the lender, or visiting their physical branches.

Application Type

A lender’s application process will affect how convenient it is for you to apply for a loan. Most lending institutions in Kenya allow you to either make your application online or physically at a branch.

A physical application means you have to provide physical copies of the required documents and submit them to one of the lender’s brick-and-mortar branches. This takes some time and can sometimes be inconvenient. Note, however, that most lenders will opt for physical applications when large sums of money are involved.

A smartphone will typically be required for you to apply for a personal loan online through mobile apps. However, most digital loan service providers (including commercial banks) also offer USSD loan application services that do not necessarily require one to have a smartphone.

Online applications are a lot easier and more convenient for most people. Here, all the required information and documents are submitted digitally, and the application process is usually very simple. Online applications are usually more common for loans involving smaller amounts of money. The speed in the processing of online loan applications is attributable to the fact that lenders are scraping a lot of personal information from your device (when installing an app, you give the lender permission to do this).

Keeping other factors constant, loans that allow online applications are much more preferable than those that require physical applications.

For instance, let’s say you work in Nairobi and have a farm outside Nairobi. You travel to your farm and realize that you need Kshs100,000 to buy some supplies, but you don’t have the money, so you decide to take a loan from your bank to buy the farm supplies.

With a physical application, this would mean traveling back from your farm to your nearest bank branch to submit the loan application documents, which can be very inconvenient. With an online application, however, you’d just submit the application documents from your smartphone while still at your farm and wait for the money to hit your account.

Credibility Of The Lender

Some borrowers don’t give much consideration to how credible a lender is (after all, what you need is the loan, right?). However, it is very important to ensure that you’re getting a loan from a lender who is reliable and trustworthy. Some of the things you need to watch out for here are…

Transparency

Credible lenders will be transparent about all the fees and charges associated with your loan, so you know what to expect right from the start. Unscrupulous lenders, however, will hide some charges and fees behind the fine print, meaning you’ll only find out about this after taking the loan and end up paying more than you had anticipated.

Good Documentation

How a lender handles their documentation is also very important. A disorganized lender with poor documentation could lose records of some of your loan repayments, something that could leave you “in debt” even when you have cleared your loan and lead to unexpected disputes.

If the lender provides an easy way to track your repayments - especially an online ledger where you can be certain your repayment has been received and logged, then you can have the confidence that you will have your own record in the case of ‘missing’ repayments. Many lenders with online banking platforms and applications should have a feature to track or query your repayment history. You can inquire about this before taking a personal loan.

Scams

Some scammers will pretend to offer you personal loans at amazing interest rates and without much requirements for qualification, but in actual sense, they’ll be trying to dupe you into paying “processing fees” for loans that you won’t get. To avoid such situations, it is best to get loans from lenders with credible reputations.

The best way to determine the credibility of a lender is to check the kind of experience other borrowers have had with the lender. Read social media reviews from other people who have borrowed from the lender, and check for lender reviews at money254.co.ke

Minimum and Maximum Amount You Can Borrow

When choosing a personal loan product, you also need to consider whether the minimum and maximum loan amount given matches your needs.

For instance, if a certain lender only allows you to borrow a maximum of Ksh250,000, but what you need is Ksh400,000, this loan will not meet your needs. Similarly, if a lender has a minimum loan limit of Ksh50,000, but you only need Ksh20,000, borrowing from such a lender would mean borrowing more than you need.

One thing you need to keep in mind when it comes to the minimum and maximum loan amount is that bigger is not always better. Just because a lender is willing to loan you Ksh1 million, this doesn’t mean you need to borrow the whole amount. Instead, it is recommended that you first figure out how much money you need, and then take a personal loan that is enough to take care of your needs/goals, without going overboard.

Application Approval Time

All lenders don’t take the same amount of time to process your loan application and deposit the money into your account. With some lenders, you will have the money in your account in about 24 to 48 hours after making your application, while others will take up to 2 weeks to process your application.

The amount of time a lender takes to approve your application has a huge influence on how suitable a loan product is for you. For instance, if you have a medical emergency and need access to money immediately, a personal loan that has a one-week approval time might not be the best for you in the circumstances.

However, if you do not need the funds in a hurry, you can afford to borrow from a lender with longer loan approval times.

The key determining factor in application processing time is the type of loan you are applying for. Some lenders may move fast on credit card applications but take a longer time to approve a mortgage application.

But even then, every lender will have their own specific processing times depending on their processes and requirements of the applicant.

Repayment Considerations

Before taking a personal loan, it is also very important to think about the repayment terms for the loan and whether they will work for you.  Some factors to keep in mind here include…

Monthly Installments

How much will you be required to pay in monthly installments for the loan you are interested in? Generally, the larger the loan amount, the more you’ll need to pay every month. Are you able to afford these repayments?

When evaluating how affordable the monthly installments are, don’t just look at your income. You also need to consider your expenses. If you deduct your recurring bills and expenses from your income and set aside some money for some unforeseen expenses, will you still have enough money to cover your monthly installments?

It’s also good to note that it is possible to bring down your monthly installments by getting a personal loan with a longer repayment period, though this will have an impact on the total amount payable.

Automatic Withdrawals

Is it up to you to deposit the required monthly repayment to the loan account, or does the lender require you to set up automatic withdrawals of the monthly payments every time your monthly installment is due? Will the lender reduce the interest rates for the loan if you opt for automatic deductions?

It’s good to note that, while automatic withdrawals will save you from penalty fees due to late payments, automatic withdrawals can also lead to unexpected overdraft fees and other charges in the event that you don’t have sufficient funds in your account on the due date.

Are There Penalties For Early Repayment?

Many first time borrowers assume that repaying their loan early is good news to the lender. When you clear your loan before its term, the lender is going to miss out on some of the interest you would have paid for the entire term of the loan. To recoup some of this anticipated profit, some lenders will charge you a fee for early repayment.

If there is a chance that you will clear your loan before its term, it is important to check whether your lender has any early repayment penalties, since this can drive up the cost of credit.

Cost Of Credit

This is one of the most important things you need to consider when it comes to choosing a personal loan product. Cost of credit refers to the additional amount of money that you will have paid on top of the loan amount by the time you repay the loan completely.

For instance, if you take a loan worth Ksh1 million, and by the time you clear the loan you have paid back Ksh1.35 million, then the cost of credit in this case is Ksh350,000. Ideally, you want to go for personal loans with the lowest cost of credit.

The cost of credit is affected by the following factors:

Interest Rate

The amount of interest charged on your personal loan is what makes the greatest contribution to the cost of that loan. Even small differences in interest amounts can result in huge differences in the cost of credit, especially for long term personal loans, and therefore, this is something you need to be very careful about.

For instance, if you take a Ksh1 million loan at a 12%  interest rate and a repayment term of 5 years, you will pay back a total of about Kshs 1,335,000, without taking into account any other charges and fees.

If you take the same Ksh1 million loan with the same 5 year repayment term, but with a 15% interest rate, you will pay back a total of about Ksh1,427,000. That is a Kshs 92,000 difference.

To avoid pushing up your cost of credit, you need to shop around and find lenders that are offering the lowest interest rates for the loan amount you are interested in.

Aside from interest rate, you also need to consider how the lender applies their interest. Some lenders will charge a flat interest rate, which means the monthly interest is applied on the full loan amount. Other lenders will charge interest on reducing balance, meaning that the monthly interest will be applied to the outstanding loan amount.

Sometimes, a higher interest rate on reducing balance can be cheaper than a lower interest rate on a flat interest rate. Therefore, before making your final decision, it is important to calculate the total cost of credit for each lender based on their interest rate and interest application method, rather than just comparing the interest rate.

It’s also good to note that lenders can also vary the interest rate they charge you based on other factors like the loan amount, your credit history, and the loan term.

Application Fees

Some financial institutions will require that you pay a small flat fee when you make the loan application. The loan application fee is non-refundable and is paid whether you qualify for the loan or not.

While the loan application fee is usually a relatively small amount (about Ksh500 to Ksh5,000) depending on the loan amount, it can still drive up the cost of credit, especially if you apply for multiple loans that you do not end up qualifying for. Fortunately, there are some lenders who do not charge application fees.

Origination Fee

This is a common fee that is charged by lenders. The origination fee is applied after your application has been approved and the funds deposited into your account.

Some lenders will deduct the origination fees from the amount deposited into your account, while others will factor the origination fees into your monthly payments.

The origination fee is usually charged as a percentage of the total loan amount and will typically fall between 1% and 6%. For instance, if you are applying for a Ksh100,000 personal loan with a 3% origination fee, you’ll pay Kshs 3,000 as origination fees.

Late Payment Fee

Almost all lenders will charge late payment fees whenever you fail to make your monthly payments on time. Lenders usually charge late payment fees in order to encourage borrowers to make their payments on time.

Late fees can be charged either as a flat fee, or as a percentage of your monthly installment. It’s also good to note that some lenders will apply the late payment fee for every day elapsed past the due date, which can quickly add up into huge amounts.

Since the late payment fee is charged by almost all lenders, the only thing you can do to avoid this fee is to make your payments on time.

Loan Insurance

Some lenders will require that you pay for a loan insurance cover before to cover the risk of non-payment should you lose your source of income, either due to loss of employment, injury, illness, or even death. For other lenders, it is available as an option but is not mandatory.

The cost of personal loan insurance will usually be less than 1% of the loan amount. Still, it is possible to avoid this expense by borrowing from a lender who does not require loan insurance.

Early Payment Penalty

As we saw earlier, the early payment penalty, which is applied when you clear your loan ahead of schedule, can also contribute to driving up your cost of credit.

The best way to drive down your cost of credit is to calculate the total amount you will be required to pay back by different lenders based on the interest rate offered and the fees and charges applied, and then determine which lender is most suitable for you.

Excise Duty

The Finance Act 2018 introduced a 20% excise duty on all bank transactions including personal loan transactions. This increase led to a rise in the cost of credit as lenders adjusted the total cost of credit upwards to reflect this 20% excise duty.

However, in the Finance Bill 2020, this 20% excise duty on bank loan fees was scrapped by the Treasury. But excise duty on other fees not linked to credit processing such as obtaining account statements were retained, meaning banks could possibly reduce the cost of credit.

However, the 2020 Bill also introduced a 20% tax on loan processing fees or rather ‘fees and commissions earned in respect of a loan or any share of profit’. If approved this would mean a pseudo-excise tax element in the total cost of credit.

Loan Tenure

The final consideration to make before taking a personal loan is the loan tenure, which refers to the duration of time within which you need to have cleared your loan.

A lot of borrowers assume that personal loans with long repayment periods are better because they have lower monthly repayments. However, increasing the loan repayment period means you will end up paying more interest overall, which will drive up your cost of credit.

For instance, if you take a Ksh1 million personal loan with a 14% interest rate and a repayment period of 2 years, the monthly payments will be about Kshs 48,000, while the total payment will be about Kshs 1,152,000.

If, on the other hand, you take the same Ksh1 million loan with the same 14% interest rate and a longer repayment period of 5 years, the monthly payments will be much lower at Kshs 26,000, but the total payment will be way higher, at Kshs 1,396,000. This is a Kshs 244,000 difference.

The best option, therefore, is to find a personal loan that offers the right balance between monthly installments that you can pay comfortably, and a short loan tenure.

Wrapping Up

With multiple personal loan products to choose from in the Kenyan market, you need to compare various loan products and make sure that you are getting a personal loan that is most suitable for you and your needs. You can get started on your comparison journey here at Money254.

When it comes to evaluating a personal loan, the first thing you need to determine is whether you meet the eligibility requirements for the loan. After confirming eligibility, determine the application type, and then confirm whether you are dealing with a credible lender who will not scam you, mess up your records, or hit you with hidden charges.

Next, make sure that the minimum and maximum amounts you are allowed to borrow are enough to meet your needs, and if you need the money quickly, check whether the lender’s loan approval time will allow you to get the money when you need it.

You’ll also need to look at the repayment considerations, including whether you can afford the monthly installments, and whether there are penalties for early payment. Next, check the cost of credit to make sure you won’t end up paying too much for the loan. Finally, confirm whether the loan gives you a repayment period that allows you to pay back the loan comfortably, but without making the loan too expensive.

If all this checks out, and you have found a personal loan that is most suitable for your needs, you can then go ahead and start your application.  

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.

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