If you're struggling with mounting debt due to high interest rates or reduced income, you might be looking for a way to regain control of your finances. One path you can take to reduce the cost of the loan or monthly repayments is to change lenders through loan buyoffs.
Consider Peris, a 33-year-old High school teacher. In 2020, she took a Ksh1m loan from her bank to buy a plot. She recently had a baby, so her expenses increased, and servicing her loan became challenging. Additionally, with rising interest rates, her minimum monthly repayments were increased. This affected Peris's financial flexibility as she started experiencing budget deficits and struggling to save.
Peris began searching for solutions to improve her financial situation. One day, while discussing her challenges with a colleague, she learned about the possibility of a loan buyoff from her Sacco. She decided to explore this option further and scheduled a meeting with her Sacco to discuss the possibility of refinancing her existing bank loan.
After learning about the benefits of loan buyoff, she got two guarantors and transferred her bank loan to her Sacco. She was able to make her debt more manageable, reduce the interest rate, and improve her financial flexibility.
Are you struggling with your existing loan and wondering if a loan buyoff can be a solution? This article is for you.
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Loan buyoff refers to the process where a new lender acquires and pays off your existing loan balance from your current lender. Subsequently, this transfers your outstanding debt balance from one lender to another. Borrowers typically do this to obtain more favorable terms or conditions on the new loan.
The new loan is called a “buyoff loan.” This is a financial arrangement where a new lender settles your outstanding debt with your current lender on your behalf. As a result, you become indebted to the new lender, and you are required to repay the new loan under the terms and conditions agreed upon with this lender.
As a borrower, you initiate the process by applying for a buyoff loan from the new lender. In your loan application, you specify your intention to use the funds from the new loan to pay off an existing loan held with your current lender.
The new lender will assess your creditworthiness, just as they would with any loan application. If your application is approved, the new lender offers you a fresh loan with the terms and conditions you agreed on. Depending on the type of loan being bought off and the new lender's terms, they'll either disburse the funds to you to settle the existing loan or contact your current lender and pay off the loan directly on your behalf.
Typically, the new loan amount will be enough to cover the outstanding balance of your existing loan, including any associated fees or penalties for early repayment. Additionally, as a borrower, you might be charged an arrangement fee/commission (a one-time fee charged by the new lender when you apply for a buyoff loan) and other loan application fees.
With that in mind, let’s look at two examples of buyoff loans.
Buyoff loans can offer a potential solution for individuals considering transferring their personal loans from one lender to another. This option is available for both secured and unsecured personal loans.
Let’s say, for example, you have a Ksh450,000 outstanding personal loan with your bank, and you think their interest rates are high. You can approach another lender offering lower interest and apply for a buyoff loan to transfer that balance to the new lender.
In the first scenario, you might explore the possibility of moving your personal loan from your current bank to another bank. Conversely, you can also use a buyoff loan to transfer your existing bank loan to a SACCO, microfinance institution, or microfinance bank. Or from any of these lenders to a bank.
This shift could be appealing if these alternative institutions provide terms that align better with your financial objectives than your current lender.
If the personal loan is secured, the collateral will also be moved to the new lender, depending on the terms of your new loan. For example, if you took a personal loan using your title deed loan from a Sacco but want to transfer your loan to a bank, the collateral plus the outstanding balance will be transferred to the bank.
Titus took out a logbook loan with a microfinance institution (MFI) to meet urgent financial needs. However, as time passed, he realised that the interest rates and repayment terms were becoming increasingly burdensome. He also found himself in need of extra funds for an unexpected family emergency. After some research, Titus decided to explore the option of a logbook loan buyoff.
In this process, Titus approached a microfinance bank (MFB) to take over his existing logbook loan. The new lender assessed his application and approved his buyoff loan. The lender then paid Titus’s outstanding debt at the MFI and gave him the extra cash.
This effectively shifted Titus's debt from the old lender (MFI) to the new one (MFB), creating a new loan arrangement. The logbook, which was collateral for the loan, was also transferred to the MFB. While this move helped Titus achieve his goals, he also had to pay for a second vehicle appraisal, NTSA transfer charges, and an early prepayment fee. Lucky for him, the MFB didn't charge an arrangement fee.
If you have a logbook loan and are considering a buyoff loan, most MFIs and MFBs in Kenya offer this service.
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A buyoff loan can come in handy in many situations, including when:
You can reduce the interest rate of your outstanding loan when you take a buyoff loan and transfer your debt to a new lender. For example, let's say your current lender (e.g., a microfinance institution) charges you 14% interest per annum on a personal loan, and a new lender (e.g., a commercial bank) is promising you a 12% pa rate. Switching lenders using a buyoff loan will lower your loan cost.
However, before switching, compare buyoff loan interest rates and associated costs like loan processing fees, transfer fees, and arrangement commission.
Another reason for opting for a buyoff loan is to extend your repayment tenure and reduce your monthly repayments in the process. When you transfer your loan to a new lender, it's treated as a fresh loan. This means you can negotiate for longer tenure and reduced installments. This flexibility ensures your loan fits comfortably within your monthly budget.
You can also consider a buyoff loan if the services offered by a potential new lender surpass your current one. For instance, you prefer automatic payments with standing orders over manual repayments, and your current lender doesn't offer it. Or, your current lender offers bad customer service, and after doing research and reading online reviews, you find a lender with better customer care.
Switching lenders can also provide you access to more funds through a top-up loan. When applying for a buyoff loan, you can apply for higher amounts than your outstanding loan balance. The lender will use part of the funds to settle your existing loan and transfer the extra to you. This can be useful when your current lender can't refinance your loan.
Loan consolidation involves combining multiple loans into one to simplify your debt management strategy. You will typically need to obtain a new loan to pay off all your existing debts, leaving you with just one loan to manage. If you have multiple loans, you can use a buyoff loan to consolidate them.
For example, you have a total debt of Ksh370,000 from various sources, including logbook loans, credit cards, and digital loans. Managing multiple debts with varying interest rates and due dates can be overwhelming and costly. To consolidate these debts, you can apply for a new logbook buyoff loan of Ksh400,000 from a different logbook lender. Once approved, you can use the funds to pay off all your existing debts, clearing your logbook loans, credit card balances, and digital loans.
After consolidating your debt with the Ksh400,000 buyoff loan, you'll have just one loan to focus on—the new logbook buyoff loan.
Before you decide to take a buyoff loan, you should weigh the pros against the cons.
Before taking a buyoff loan to transfer your debt, assess your financial situation and your ability to qualify for and repay the new loan carefully. Consider your current income, expenses, and any other financial obligations. This will help you determine if you can afford the new loan.
Finally, remember to explore alternative debt management solutions. For example, consider renegotiating terms with your current lender or using a personal loan to consolidate your debts. If you settle on buyoff loans, ensure to do your homework by comparing lenders to find one that aligns with your needs.