All personal loans are not created equal. If you are thinking of taking a personal loan to cover some expenses, you’ll need to consider the different types of personal loans available and decide which one is most suitable for you.
To make it easier for you to find the most suitable loan for you, we have reviewed the different types of personal loans available in Kenya, as well as their features. The different loan types are divided into two major categories – unsecured and secured personal loans.
Unsecured personal loans are loans that do not require you to pledge any assets as collateral for the loan. Without an asset to act as security for the loan, lenders determine whether you qualify for an unsecured personal loan by checking your creditworthiness and your income.
For instance, if you are listed with the Credit Reference Bureau (CRB), you are unlikely to get approved for an unsecured loan, since you are seen to have a high risk of default. Your income, on the other hand, allows lenders to calculate your debt-to-income ratio and determine your ability to pay back the loan.
Since they do not require any collateral, unsecured personal loans are much easier to qualify for compared to secured loans. They are also accessible to people who are just starting out in life and have not had time or opportunity to own assets.
However, because of the higher amount of risk for lenders, unsecured loans usually attract higher interest rates, and usually offer lower loan amounts compared to secured loans.
Just because unsecured loans do not require an asset to back the loan, however, this does not mean that lenders do not have any recourse in the event that you are unable to pay back the loan. If you default on the loan, a lender can take you to court, or engage a collection’s agency to collect the debt for them.
Some of the different loan types available if you are looking for an unsecured personal loan include:
Check-off loans are a type of unsecured loans that are only available to people who are formally employed. Check-off loans are not available to people who are self-employed, as well as those in the jua kali sector.
One key feature of check-off loans is that the repayments for the loan are deducted directly from your salary by your employer and remitted to the lender’s account.
For you to be eligible for a check-off loan, your employer needs to have a memorandum of understanding with the lender. Check-off loans are also available to civil servants and employees of parastatals and state corporations.
Employers usually get into MOUs with lending institutions in order to offer check-off loans as an employee benefit or perk for attracting new talent and encouraging existing talent to stay with the employer.
With a check-off loan, you can borrow from as low as Ksh5,000 to millions of shillings, though the maximum amount you can borrow will be highly dependent on your income.
Owing to the MOU between your employer and the lender, it is very easy to get approved for a check off loan. In addition, check-off loans are usually processed very quickly, you don’t need to have an account with the lender to qualify for the loan, and the payment terms are quite flexible.
Since repayments for check-off loans are deducted directly from your salary and remitted to the lender, this also ideally means that you’ll never have to worry about late payments.
Non-check off loans differ from check-off loans in two ways. First, they are not deducted directly from your income and remitted to the lender. It is up to you to make the loan repayment on or before the due date, failure to which the loan could attract late payment penalties.
The second difference is that your employer doesn’t need an MOU with a lender in order for you to be eligible for a non check-off loan. Non check-off loans are available even to self-employed people and those outside formal employment. All you need to do is to provide proof that you have a consistent income. Most lenders will also require you to have held an active account with them for a specific period of time.
Non check-off loans allow you to borrow anywhere from a few thousand shillings to millions of shillings, depending on your income. One thing to keep in mind, however, is that non check-off loans are riskier for lenders compared to check-off loans, which means that non check-off loans will usually attract higher interest rates.
Payday loans are short term loans that are payable by your next pay day. These loans are a great way to cover unexpected cash needs until you receive your next salary. Payday loans are also referred to as cash/salary advance loans.
One notable thing about payday loans is that before getting the loan, you’ll need to give the lender advance authority to withdraw the owed amount, plus any other fees and interest from your account once your salary is deposited. Alternatively, the lender may require that you write them a post-dated cheque for the owed amount.
The greatest benefit of payday loans is that they have minimal qualification requirements, which makes them easily accessible to most people. The downside is that these loans will not give you access to large sums of money. In addition, their interest rates and late payment penalties could be typically very high.
When issuing a payday loan, most lenders only look at their ability to collect the money owed, rather than your ability to make the payments while meeting your other obligations. As a result, payday loans can easily leave you in a debt trap if you are not cautious.
For instance, let’s say your monthly income is Ksh70,000, and you have a payday loan worth Ksh50,000. Once your salary is deposited, the lender will immediately withdraw the Ksh50,000 owed plus interest and fees. This can easily leave you with too little money to survive, forcing you to take another payday loan, thus getting you into a cycle of debt.
Cosigned and guarantor loans are a great way for people with poor or no credit history to get access to funds without the need for collateral.
When you have poor or no credit history and no collateral to provide for a loan, lenders view you as a risky borrower. However, it is possible for you to reduce the lender’s risk (and therefore get approved for the loan) by getting a third party with good credit history to guarantee you for the loan. The third party could be a close friend, a relative, or even a colleague.
When someone agrees to cosign your loan or guarantee your loan, they are basically agreeing to be held liable for the loan in the event that you default. In other words, they are promising to pay back your loan if you are unable to.
The greatest advantage of cosigned and guarantor loans is that they allow you to access loans that you would not have otherwise qualified for. They also allow you to borrow amounts larger than you would have qualified for when borrowing without a guarantor.
The downside to cosigned and guarantor loans is that the interest rates are significantly higher compared to those of standard loans. In addition, defaulting on the loan means that your guarantor will have to take up the burden of the loan. This can easily ruin the relationship between you and your guarantor.
An overdraft is a loan facility offered by your bank or other financial institution, allowing you to withdraw more money than you have in your account.
For instance, let’s say you have an emergency that requires Ksh30,000. You go to the ATM to withdraw Ksh30,000, but unfortunately, your account only has Ksh20,000. If you have an overdraft facility set up, you can still withdraw Ksh30,000, despite having only Ksh20,000 in your account. In this case, the extra Ksh10,000 is the overdraft.
Whenever you use the overdraft facility, the financial institution will charge you interest on the overdraft (the Ksh10,000 in our example), plus a fixed overdraft fee. When you set up an overdraft facility on your account, the financial institution will usually set a limit on the amount of money you can overdraw.
Overdrafts offer several advantages. First, they allow you to access the overdraft multiple times, without having to first repay the overdraft completely.
For example, let’s say you have an overdraft limit of Ksh50,000. Even when you have no money in your account, it is possible to withdraw Ksh10,000 today and another Ksh20,000 tomorrow, without having to first repay the Kshs 10,000.
Another advantage of overdrafts is that once you are approved for an overdraft, you can keep accessing this credit facility over and over without requiring to apply and get approved again. Overdrafts also allow you to borrow only as much as you need at the time, thus helping keep your costs low.
On the flip side, the financial institution giving you access to the overdraft facility bears the right to ask you to repay the overdraft at any time. In addition, you’ll need to maintain a current account with the lender in order to be eligible for overdrafts.
An example of a popular low-level overdraft facility is Safaricom’s Fuliza MPESA, which allows you to send money or pay bills even when you have insufficient funds in your MPESA account.
Over the last decade, mobile loans have become an easy source of credit for Kenyans. According to a study by FSD Kenya, more than 1 in every 10 Kenyans has taken a mobile loan.
Mobile loans are credit facilities that can be applied directly from your mobile phone, and the funds disbursed directly onto your mobile wallet. Mobile loans are usually accessed through a mobile app on your smartphone, or through USSD and come with relatively short repayment terms, usually between 1 and 30 days.
Initially, mobile loans were popularized in Kenya by telecommunication companies and various unregulated digital lenders. Seeing the potential of the industry, however, even banks and other major financial institutions have made their foray into mobile lending.
Mobile loans offer several advantages. The most obvious one is their convenience. You can access a mobile phone from anywhere, provided you have a phone with a network connection. In addition, most mobile loans are immediately disbursed to your mobile wallet, giving you instant access.
Another advantage of mobile loans is their minimal qualification requirements. You don’t need to provide any collateral, you don’t need to provide proof of income, or many of the other requirements asked for by other lenders.
In addition, to be eligible for a mobile loan, you don’t need access to a formal bank account. This makes these loans accessible to just about anyone. Since they don’t require proof of income, mobile loans are also a great option if your income does not allow you to access personal loans from formal financial institutions.
Finally, mobile loans also provide you with multiple options. Unlike with formal lenders, where you might only qualify for personal loan products from one or two institutions, there are tens of mobile loans that you can borrow from. This gives you the opportunity to compare different mobile loans and pick the most suitable for you.
The downside to mobile loans is that they have very high interest rates. In addition, some mobile lenders have been shown to have predatory practices, such as harvesting data from users. Therefore, you need to exercise caution when accepting the terms and conditions of these mobile lenders, and check the permissions that your use of these apps grants to these mobile lenders.
Secured personal loans are those that require you to provide something of value to act as collateral for the loan. Since there is a valuable item backing the loan, secured personal loans present lower risk for lenders. This is because the lender has the option of selling the loan’s collateral to recoup their funds in case you default on the loan.
Secured personal loans have two distinct advantages over unsecured personal loans. Due to the lower risk level, they attract lower interest compared to unsecured loans. In addition, with a secured loan, it becomes much easier to get access to larger amounts of money and negotiate for longer repayment periods.
It’s good to note that secured loans present a higher risk for you as a borrower compared to unsecured loans. In the event you are unable to pay off the loan, you risk losing whatever you used as collateral for the loan.
Some of the types of secured personal loans that you can take in Kenya include:
Log book loans are personal loans that are borrowed against the value of your vehicle. You can borrow a logbook loan against a car, a lorry, a bus, a motorcycle, or any other kind of vehicle. They are referred to as log book loans because the lender will require you to surrender your vehicle log book to them before giving you the money.
When you apply for a log book loan, the lender will first perform a valuation of your vehicle, and then determine the maximum amount you can borrow based on the vehicle’s value. This is usually given as a percentage of your vehicle’s value. This means that, depending on your vehicle’s value, log book loans can allow you to borrow anywhere from about Ksh50,000 to millions of shillings.
The repayment period for logbook loans will range from one month to several years, depending on the amount borrowed, as well as the lender’s terms.
One of the greatest advantages of log book loans is that they give you easy access to money while still allowing you to continue using your vehicle like you normally would.
In addition, log book loans usually have very fast application approval times.
Another advantage of log book loans is that once you provide proof of ownership for a vehicle, there are minimal qualification requirements, making these loans easily accessible to anyone with a vehicle, even if you don’t have demonstrated credit worthiness.
Asset loans are personal loans that allow you to provide your personal assets as collateral for the loan. Asset loans are a great option when you want to borrow a large sum of money at relatively low interest rates.
Some of the kinds of assets you can use as collateral for a personal asset loan include:
When borrowing against a personal asset, the amount of money you can access, as well as the interest rates and loan tenure will depend on the kind of asset you provide, as well as its value.
Generally, highly liquid assets like cash in savings accounts, bonds, stocks, and money market accounts will attract lower interest rates compared to illiquid assets like property, art, and antiques.
These are short term personal loans that are offered by pawn brokers. In Kenya, these are commonly known as “instant loan on items” providers or shylocks. Pawn shop loans are an easy way to get money when you need it urgently, but they are a very costly way of getting money.
To access a pawn shop loan, you’ll need to get a valuable item and deliver it to the pawn broker or shylock as collateral for your loan. Examples of items you can use as collateral for pawn shop loans include electronics and household items like TV sets, laptops, refrigerators, home theaters, bicycles, phones, gaming consoles, and so on.
The shylock will assess the value of the item, its condition and resale potential and determine the amount they are willing to give you for the item. In most cases, the shylock will allow you to borrow anywhere between 25% and 70% of the item’s expected resale value. The shylock might also ask you to provide proof of ownership or purchase for the items. This prevents people from presenting stolen goods to pawn shops.
Once you agree on the loan terms, the pawnbroker will give you the loan amount and a ticket showing the owed amount, the repayment period, and the interest rate. You’ll need this ticket to collect back your item once you have cleared the loan.
Pawn shop loans usually have a short repayment period of about one week to two months, depending on the amount borrowed. If you are unable to clear your loan, you can negotiate for an extension, though this will lead to higher interest. If you are totally unable to pay back the loan, the pawnbroker will eventually sell your item to recoup their money.
The one upside to pawn shop loans is that they have very low qualification requirements. Pawn brokers don’t consider your income, your credit history, or even your ability to pay back the loan. Provided you have something valuable, they will loan you money. This makes them a good option if you do not have access to formal personal loans.
On the flip side, pawn shop loans attract very high interest rates, making them a very costly way of accessing personal credit.
If you are interested in taking a personal loan, it is important to take the time to consider which type of personal loan will work best for you and your situation.
If you are looking for a personal loan that doesn’t require any collateral, your options include check-off loans, non check-off loans, payday loans, guarantor loans, overdrafts, and mobile loans. The most suitable unsecured personal loan for you will depend on factors like the amount of money you need, your employment status, your income, and your creditworthiness.
If you have something to borrow against, you can opt for a secured loan. While providing collateral increases your likelihood of qualifying for a loan, it also increases your risk. If you opt for a secured personal loan, the most common options are logbook loans, asset loans, and pawn shop loans.
It is our hope that this guide has provided you with all the information you need to help you figure out which type of personal loan is most suitable for you.
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