Other Considerations before Taking a Personal Loan in Kenya

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.

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.

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.

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.

• 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

Another 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. 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.

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.

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.