It’s mid-February, Valentine’s Day deals are over, you probably did a little spending on your loved one(s), payday is still far away but you are in fairly urgent need of some cash to last you till then.
Should you take a digital loan?
To answer this question, in today’s article, we use a case study of the LendPlus digital loan to help you visualise the key consideration factors before taking a digital loan.
First things first, a digital loan is a type of personal loan that is offered through a digital platform such as a website, an app or in some instances USSD.
In Kenya, digital loans are primarily associated with non-deposit-taking app-based lenders, but there are a couple of bank apps that fall under this category.
You can apply for a digital loan at any time of day and from anywhere you are through a fairly straightforward process. It can be summed up in four simple steps outlined below:-
Benefits: Apart from quick decision-making on applications, fast disbursements, easy access, convenience, and being handy during emergencies, digital loans crucially, allow borrowers who may have a less-than-perfect credit history to access loans easily when traditional lenders would typically shun them.
Pitfall: One major downside with digital loans is the possibility of taking a loan when someone has not really thought out how they are going to repay it. If you apply for a digital loan without considering your financial situation, a plan for utilising the funds productively, and a concrete repayment plan you could end up defaulting which could negatively affect your future access to credit.
That is why digital lenders such as LendPlus have internal mechanisms to determine an applicant’s ability to repay before qualifying them to borrow. This is in line with the Central Bank of Kenya (Digital Credit Providers) Regulations, 2022 that require lenders to only lend to those whose ability to repay has been ascertained.
“A digital credit provider shall not advance digital credit to a customer unless it has first taken reasonable steps to satisfy itself on the customer’s ability to repay the credit facility,” the regulations read in part.
If defaulting can negatively affect your future access to credit and the fact that a digital loan is paid with interest, a wise borrower has to always ensure they are borrowing for the right reasons. Below, we discuss some of the reasons people are taking digital loans.
It is important to emphasise the fact that you have the ability to repay before the due date. Note that digital loans typically have interest rates that can be significantly higher than traditional loans. And the rates can go higher depending on how long you borrow for.
But since you urgently need the cash and digital loans offer arguably the fastest disbursement times of any loan type, if you are in an emergency situation, then taking a digital loan is justifiable.
However, even in an emergency situation, you need to know that you can actually repay this loan, where those funds will come from, and when exactly you will have that money.
There are only a few digital lenders, such as LendPlus, that allow you to extend your repayment period. LendPlus stands out in the fact that if you extend before the due date, there is no extra cost applied.
Nevertheless, for your extension to be approved with LendPlus, you have to pay at least the interest accrued on the loan up to the date of repayment extension request. You do not have to repay the principal amount. So you may need to have at least some little money somewhere to clear the accrued interest to qualify for an extension.
If you are a business person, whether full-time in business or it is a side hustle, a digital loan may come in handy if you urgently need cash for a business reason but the people who have been buying from you on credit are yet to pay.
Since business funds are what is supposed to be used to repay this loan, then you have to determine whether by the time the loan amount is due your debtors will have paid up.
You may want then to choose the loan tenure that best matches with the time when your debtors are usually supposed to repay.
If you borrow from LendPlus, for example, you can choose any repayment period between a minimum tenure of 5 days and a maximum tenure of 30 days.
Since LendPlus charges a daily fee of 2%, you can save on the interest charged by choosing the specific time period when you know the people who owe you will have paid up. This is unlike other digital loans that have a fixed interest rate regardless of loan tenure.
In the event that your debtors delay in paying up, LendPlus gives you the option of extending the loan by up to the number of days you had borrowed it for. In such a scenario, you may only want to extend it by the number of days you expect the payments to delay.
If you are employed, you may already be familiar with the challenges one may face especially in the last week before payday if the salary has already been utilised.
You can take a digital loan to help you survive the days leading up to payday since you are already sure that your salary will check in at a specified date (or thereabout).
LendPlus, for instance, promises to disburse loans to even first-time applicants in just 15 minutes from the time you download the LendPlus Digital Loan App, register, apply, and have the funds in your M-Pesa.
If you are applying for the first time, you have a loan limit of Ksh15,000 - which is a relatively high first loan when compared to other digital lenders - and a maximum repayment period of 20 days.
Your LendPlus maximum loan limit increases to Ksh30,000 and the maximum tenure to 30 days once you have repaid your first loan.
For this reason, the digital loan sits at the same level as taking a salary advance from your employer, your banking partner, or borrowing from friends and family.
Always consider your options, your money needs (maybe speed is the biggest factor?), costs, and other factors that matter most to you before making a decision.
If you are growth-minded (which we all should be), you probably already are familiar with the concept of ‘building wealth using other people’s money’. That is using either borrowed or free money to build an income for yourself.
Loans are one of the ‘other people’s money’ referenced above and can be great for long-term investments such as real estate as well as self-development goals like higher education and venturing into business.
Typically, some financial institutions may not advance you a second loan before you can clear the balance on the first one. If you need a second loan from the same lender, sometimes you may be required to take a new bigger loan that includes the new amount or have to pay some additional fees.
Instead, you may opt to take a digital loan to sort out your urgent need while still servicing an existing loan. As we have emphasised above, it is not advisable to take a loan when you do not have a clear repayment plan.
For LendPlus, for example, you only need your ID number to apply for a quick digital loan. No other documentation is needed. You will, however, need to have an active M-Pesa wallet, be aged between 21 and 60, have a credit history, and not be in certain professions such as the army, police, or in the security sector.
If you are in business, work as a freelancer where you are paid per job, are a consultant paid several times in a month or engaged in any other activity where you have regular cash flow, a digital loan may come in handy in between pay cycles.
Note that the biggest consideration factor is ability to repay in full and in time. If for example you are paid every 10 days and need some cash to restock, fix your freelancing laptop or travel for a consulting job, you can take a 10-day digital loan such as LendPlus’ and comfortably pay back when your clients pay you.
Generally, when the advantages of speed, convenience and flexibility meet ability to repay - especially when enhanced by more frequent pay cycles - a digital loan can be a viable option for your urgent cash needs when you are servicing other loans.
As always, compare all the options available to you and determine the best course of action.
While there are some good use cases for digital loans, it is possible to abuse the very same advantages of digital loans alluded to above and potentially find yourself with debt you are unable to repay.
Yes, digital loans are fast, convenient, flexible and offer people shunned by traditional financial institutions a chance to benefit from the usefulness of credit access. But this does not mean you have to borrow.
Here are some not-so-great reasons to take a digital loan:
1. Taking a digital loan simply because you qualify
2. Taking a digital loan because you are broke
3. Taking a digital loan to simply ‘see how it works’
4. Taking a digital loan because you think you can get away with the money
5. Taking a digital loan to pay off another digital loan - when this becomes a cycle
6. Taking a digital loan on behalf of someone else who you “hope” will repay you on time
7. Taking a digital loan for consumption reasons with no clear repayment plan
Generally, if you are not sure if you will be able to repay your loan - in time and in full - you do not have predictable income sources or have no clear plan of spending that loan, it may not be a good idea to take a digital loan.
LendPlus (legal name Aventus Technology Limited) is a FinTech company in Kenya launched by the Aventus Group that began operations in 2021. It offers instant digital loans with a fairly high limit of Ksh30,000 at a daily interest rate of 2% for a maximum tenure of 30 days with an option to extend repayment.
To be eligible for a LendPlus App Digital Loan, you have to be a Kenyan citizen of 21 years and above, be employed or self-employed with a steady income, have a valid mobile phone number with the M-PESA mobile wallet, and have a national identity card.
LendPlus, however, does not lend to Kenyans in some professions such as those in the army, police, or the security sector. There are also some counties that LendPlus is yet to begin issuing loans to. You also need to have a credit history and generally be aged between 21 and 60 years to be eligible for a LendPlus digital loan.
The LendPlus Digital Loan App is one of the relatively newest lending apps in the Kenyan market. The lender that offers digital loans of up to a relatively high maximum of Ksh30,000 at a daily rate of 2%, grew its downloads on the Google Play Store in 2022 alone by over 260,000 indicating a growing willingness by Kenyans to borrow from the app, best known for its loan repayment extension feature.
To help you further make a decision, here are some of the areas where the LendPlus Digital Loan App stands out relative to other digital lenders available to you in the Kenyan digital loans market.
Sometimes, your bills may pile up, your suppliers may delay making payments or something may come in the way of your making prompt payments. If this happens to you, one standout feature of the LendPlus app loan is the ability to extend your repayment several times by up to the number of days your loan was due. However, note that the extension also attracts a daily interest rate of 2%. See the "Interest Calculation on LendPlus Loan Repayment Extension" section below.
Note that if you choose to repay the loan early, you still have to pay the full amount of interest for the tenure that you had selected on application. For example, if you apply for a 10-day loan and pay within two days, you will still have to pay the entire interest amount that you would have paid if you repaid in 10 days. Early repayment, nevertheless, is beneficial in that it can help you increase your loan limit with LendPlus.
LendPlus promises a quick turnaround time of just 15 minutes from when you download the application from the play store to when you get the amount you applied for disbursed into your M-PESA account.
This is, however, subject to the applicant qualifying for the amount applied for and providing the requisite information needed to approve the application - this includes filling out a form that details among other things your sources of income, profession/employment type, and entering your national identification card number.
While this is an app-based digital loan, even a first-time applicant can qualify for a first loan amount of up to Ksh15,000 making this option a viable consideration even for small business owners looking for a quick cash injection. Note that the first loan has a maximum repayment period of 20 days.
Nevertheless, as all other digital lenders, loans start at a minimum of Ksh500. The minimum tenure is 5 days meaning you cannot borrow for a period shorter than this.
Once you have taken and successfully repaid your first loan (in 20 days), you can qualify for a loan amount of up to Ksh30,000 on your second and subsequent loans where the maximum repayment period is also extended to a maximum of 30 days as compared to a maximum of 20 days for a first loan.
The only documentation you need to provide to be considered for a LendPlus loan is simply your National Identification Card (ID Card) number. You no longer need to upload a picture of your ID Card. The lender from November 25, 2022, also removed the requirement to upload a selfie image as part of the application process in response to customer requests.