Personal Loans

How Long Should You Have Worked to Take Your First Loan?

October 4, 2023

A loan is a financial tool to help you achieve specific life goals. However, if not well utilised, it might become a liability. This then poses the question of when is the right time to take a loan?

As a young person, for how long do you need to have worked before you can take your first loan?

Understanding the Basics of Loans

So, what is a loan? A loan is a sum of money borrowed from a lender with an agreement of a payback, usually with interest on top. Therefore, a loan can be borrowed from family and friends with a promise of payback or money borrowed in a commercial bank or other financial institutions with a payback agreement.

Different people have different ideologies when it comes to taking loans. Some fear loans, while others are comfortable with being in debt. Some have witnessed people’s assets being auctioned because of a loan default, and some have seen individuals excel because of the access to loans.

The critical point is that a loan is neither good nor bad. How you use and manage it is what makes it good or bad.

A rule of thumb when it comes to good loan management behavior is only to take a loan that you can afford, and ideally, it should be for investment purposes, although there are exceptions. For instance, you might need to take a loan to pay the hospital bills in case of a serious illness. On the other hand, you might need to access a loan to raise school fees.

Types of Loans

Financial institutions package loans as products that they sell to their customers. Hence, there are different types of loans that one can access. Generally, you can classify the loan into two broad categories: secured and unsecured.

Secured loans

Secured loans are loans that are borrowed against collateral. Collateral is property owned by an individual that is used as security for the loan they take, in that if they fail to pay back the loan, the lending institution can sell the property and recover their money.

Secured loans are less risky for the lending institution because people tend to pay back secured loans, and also, when they fail, the bank has a way to collect their money back. Hence, these loans have favourable interest rates and relatively long payment periods.

These loans can be logbook loans, asset loans, or pawnshop lawns. The assets can be anything of value, such as a vehicle, a home, a building, livestock, machinery, crops, household items, intellectual property, and performance contracts.

As a first-time loanee, you may not have an asset to secure your loan. Therefore, most first-time loanees start with unsecured loans.

Unsecured loans

Unsecured loans are loans that do not have collateral as security. These loans can include:

● Short-term loans - These are loans that are typically paid off between one and 60 days.

● Check-off loans - These are loans whose repayment installment is deducted by the employer before the money comes to your bank account and forwarded to the crediting institution.

● Non-check-off loans - Non-check-off loans are similar to check-off loans, only that the deductions are not made by the employer but by the crediting organization.

● Salary advance loans - This is a portion of your salary that is given before the payday is due.

● Payday loans - These are loans where you take your future salary in advance, and then in the specified future, instead of the employer paying you, they use your salary as debt payback.

● Overdraft loans - Overdraft is a loan that allows you to use up to a given amount even when you have exhausted your funds in the account. A good example is Fuliza, offered by M-Pesa.

● Cosigned and guarantor loans - A cosigned loan is a loan advanced to a person without collateral, but the guarantor can pay back the loan if the loanee defaults.

As a first-time loanee, unsecured loans might be more accessible to you. However, you should remember that unsecured loans might attract high interest rates. These loans also have the possibility of enticing consumerism. Therefore, you should pay attention to avoid being drawn into a consumer debt cycle.

Factors that Lenders Consider Before Giving You a Loan

While you are toying around with the idea of taking your first loan, it is crucial that you understand what lenders look at before they give out a loan. Most lenders mainly look at three things.

Credit History

This is mainly to assess whether you have a credit history in the first place. If yes, how is it?

When we talk about your first loan, you are thinking of a loan with a significant figure. However, small loans such as Fuliza loans and mobile lenders loans also count as credit.

Hence, if one tends to default on loans such as Fuliza, Hustler fund, or mobile loans, their credit history worries the lending institution.

Therefore, always ensure your loans are paid off to keep a positive credit history.

Employment History

Employment history informs the lending organisation whether they can trust you to keep your job and repay their loan. If you have a history of losing jobs now and then, the lender may be concerned that you might lose your job again before clearing your loan, leading to a default.

Therefore as a young employee, ensure you keep the job(s) you get because that shows you are more dependable and hence can access more money at favourable rates.

Income and Debt-to-Income Ratio

Income is a significant factor in determining how much loan one can access. The higher the income, the more money one can access.

However, one cannot borrow an amount requiring monthly installments to exceed two-thirds of their salary. This is a provision by the law to protect the loanees from predatory lenders.

Therefore, even if you can access the maximum amount, you still have a third of your salary to take care of other essentials you need to live.

The Ideal Time to Apply for Your First Loan

Considering all the information shared so far, when should be the ideal time to take your first loan? There is no ideal time to take a loan. It all depends on your financial needs and goals.

Determine why you are taking the loan.

The most important question to ask yourself is why are you taking the loan in the first place? A loan is a tool, and a tool is used to get something done. Hence, when thinking of a loan, ask yourself, what is the loan going to do for me?

As a young employee, you do not want to tie yourself up in loans that do not lead to a marked improvement in your life. The loan should either add to your income or be an investment that will pay off in the future, like a student loan to return for your master's degree or a professional course.

Whereas you can also take home improvement or travel loans, such loans are not encouraged, especially for first-time lenders. When you are young, you should focus more on building capacity rather than milking the much you currently have.

Creating a Budget

You must have a budget to determine how much money you can commit to paying back your loan. A budget is a stipulation of your expenditure. Once everything is written down, you can determine if you have disposable income that can be used as debt repayment installments.

Even if you do not have disposable income, you can figure out what expenses to forego to create finances for servicing your loan.

This will inform your capability to pay back the loan.

How To Manage Your First Loan

How do you manage your first loan? First, look at some of the mistakes first-time loan applicants make.

Common mistakes made by first-time loan applicants

There are several rookie mistakes that first-time loan applicants commit. These include

Not doing enough research on the lenders, their interest rates, payback period, and other conditions.
Some applicants overborrow. They might take a huge loan that might be strenuous for them to repay.
Some fail to budget properly, and the loan management becomes cumbersome.
Ignoring the terms and conditions is another common rookie mistake. When taking a loan, make sure you read even the fine print so that there is no catch that might come back and bite you unknowingly.
Lastly, first-time loan applicants do not ask enough questions. You must ask as many questions as necessary to ensure you fully understand your commitment.

Identifying red flags in loan offers

Identifying red flags in loan offers is crucial to avoid falling victim to scams or signing up for unfavorable terms. Here are some common red flags to watch out for when evaluating loan offers:

Be cautious if the loan offer seems too good to be true, such as extremely low interest rates or no credit check required.
Legitimate lenders typically do not ask for upfront fees before processing a loan.
Be cautious if you receive unsolicited loan offers via email, phone calls, or text messages.
Read the loan agreement carefully. If the terms are unclear or the lender avoids answering your questions about the loan terms, it's a warning sign.

It's essential to thoroughly research any potential lender, ask questions, and consult with a financial advisor. If something doesn't seem right, consider it a red flag and proceed cautiously or look for alternative lending options.

How to safeguard your financial future

As you get into your first loan, you must ensure that you are thinking long-term. Having short-term goals that you might seek to accomplish using the first loan you get is great, but that short-term goal has to align with your long-term goals.

Ensure you live within your means. Do not take loans to sustain a lifestyle you have yet to achieve. It is prudent to save up to achieve the niceties rather than finance them through a loan.

Wrapping Up

There is no specific timeline for when you should take your first loan. That will depend on your financial needs and goals. While there are no stipulations on when you can take your first loan, ensuring your loan is used and managed well to avoid crippling yourself financially is always good.

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Stephen Kimani aka KIMSpeaks is a thought leader, speaker, and writer. He is also the Founder of Living the DREAM. He is passionate about learning and teaching ideas that empower people to improve the quality of their lives. You can connect with Kimani on LinkedIn.