7 Key Factors to Consider Before Applying for a Personal Loan in Kenya

Personal loans are a great way to raise money for various needs, such as starting a business, purchasing an asset, consolidating debt, or dealing with an emergency.

However, taking a personal loan is a significant undertaking that requires careful thought and consideration.

Choosing a loan product that isn’t the right fit can potentially impact your finances negatively.

So, how do you know if a personal loan product suits you?

In this guide, we’ll explore 7 key factors you should consider before applying for loans in Kenya.

7 Important Factors to Consider Before Applying for a Personal Loan in Kenya

In this section, we’ll look at 7 important factors to consider before applying for a personal loan in Kenya.

Let’s get started…

1. Eligibility

When it comes to eligibility for a personal loan, lending institutions have specific criteria to determine if you qualify.

Before you dive into the application process, it’s crucial to ensure you meet the lender’s minimum requirements.

Here are some key points to consider:

Income Verification: Lenders typically require documents to verify your income and ensure it meets their minimum monthly income criteria. This documentation, whether it’s a pay slip for employed individuals or bank statements for the self-employed, demonstrates your ability to repay the loan.
Collateral: If the loan is secured, you’ll need an asset to serve as collateral against the loan amount.
Guarantors: Some lenders may require a guarantor who agrees to repay the loan if you’re unable to do so. Alternatively, institutions like SACCOs might allow you to use your savings as a self-guarantee.
CRB clearance certificate: Certain lenders may request a clean report from a Credit Reference Bureau, confirming your lack of non-performing loans.
History with the lender: Your eligibility could also hinge on the duration of your relationship with the lender. Some institutions may require a minimum account history.

To ensure you meet the eligibility criteria, you can easily check a lender’s website, contact them by phone, or visit their physical branches for more information.

2. Application Type

When considering the application process for a loan, you’ll find that it significantly impacts the convenience of obtaining the funds.

In Kenya, most lenders offer two application options:

Online or
Physical at a branch.

Opting for a physical application means gathering hard copies of necessary documents and presenting them at one of the lender’s physical branches. This method can be time-consuming and inconvenient, especially for larger loan amounts.

For online applications, you’ll typically need a smartphone to access mobile loan apps. However, many digital loan providers, including commercial banks, offer USSD loan application services, which don’t require a smartphone.

Online applications offer greater ease and convenience. You can submit all required information and documents digitally, simplifying the entire process.

This method is more common for smaller loan amounts. The speed of online application processing is often faster due to lenders gathering personal information directly from your device (with your consent upon app installation).

Given similar terms, loans with online application options are generally preferred over those requiring physical applications.

For example, suppose you work in Nairobi but need funds urgently for your farm outside the city. If you opt for a physical application, you’d have to travel back to Nairobi to submit documents at the bank branch, which can be highly inconvenient.

However, with an online application, you could submit everything from your smartphone at your farm and await the funds’ arrival in your account, saving time and hassle.

3. The credibility of the Lender

Considering the credibility of the lender is paramount when taking out a personal loan.

While your main focus may be on securing the funds you need, it’s crucial to ensure you’re dealing with a reliable and trustworthy lender.

Here are key aspects to consider:

Transparency

A credible lender will provide clear information about all fees and charges associated with the loan upfront. This transparency allows you to understand the total cost of borrowing from the outset.

On the other hand, dishonest lenders may bury extra fees and charges in the fine print, leaving you surprised with additional costs after taking out the loan.

Transparency ensures you know exactly what you’re getting into financially. It prevents unpleasant surprises down the line and helps you make informed decisions about your borrowing.

Good Documentation

How a lender manages its documentation is critical. An organized lender with meticulous documentation processes minimizes the risk of errors or disputes regarding your loan repayments.

Clear and well-maintained documentation safeguards your financial interests. It ensures accurate recording of repayments, reducing the chances of being mistakenly considered in debt even after clearing your loan.

Repayment Tracking

A credible lender will offer convenient ways for you to track your repayments. This may include online ledgers or platforms where you can easily monitor your repayment history and confirm that payments have been received and logged accurately.

Accessible repayment tracking empowers you to stay on top of your loan obligations. It provides assurance that your payments are being properly recorded and allows you to address any discrepancies promptly.

Scams

Beware of scams promising unrealistically low interest rates and minimal qualification requirements. Such offers often aim to trick you into paying fraudulent “processing fees” for loans that will never materialize. Stick to lenders with established reputations to avoid falling victim to scams.

Being vigilant about potential scams protects you from financial fraud and ensures that you’re dealing with legitimate lenders. Researching lender reputations and reading reviews from other borrowers can help you identify trustworthy options.

To assess a lender’s credibility, explore the experiences of other borrowers through social media reviews and reputable lender review platforms.

Prioritize lenders with positive feedback and a history of reliable service to safeguard your financial interests when seeking a personal loan.

4. Minimum and Maximum Amount You Can Borrow

When selecting a personal loan, it’s vital to consider whether the minimum and maximum loan amounts offered align with your financial requirements.

Here’s why:

Ensure that the loan product’s minimum and maximum amounts suit your specific needs. If a lender’s maximum loan limit falls short of the amount you require, or if their minimum amount exceeds your needs, it may not be the right fit for you.

If you need Ksh400,000 but a lender only offers a maximum of Ksh250,000, their loan won’t cover your needs. Conversely, if the minimum loan limit is Ksh50,000 but you only require Ksh20,000, borrowing from them means taking more than necessary.

Don’t be swayed by large loan limits. Just because a lender offers a substantial amount doesn’t mean you should borrow it all. It’s essential to assess your needs accurately and borrow only what’s necessary to avoid unnecessary debt.

Take time to evaluate your financial goals and determine the exact amount you need. Opt for a loan that covers your needs adequately without exceeding them.

Remember, it’s not about borrowing the most significant amount available but rather borrowing wisely to address your specific goals.

By selecting a loan amount that aligns precisely with your needs, you can manage your finances more effectively and avoid unnecessary debt burdens.

5. Application Approval Time

When considering a personal loan, one crucial aspect to weigh is the time it takes for your application to be approved and funds to be deposited into your account.

Here’s why this matters:

Different lenders have varying processing times for loan applications. Some may deposit funds into your account within 24 to 48 hours, while others may take up to two weeks.

If you’re facing a medical emergency and urgently need access to funds, a loan with a one-week approval time may not be suitable. In such circumstances, you require a lender who can process your application quickly to provide immediate assistance.

The approval time directly affects the suitability of a loan product for your situation. If time is of the essence, opting for a lender with a swift approval process is paramount.

However, if you’re not in urgent need of funds, you may be able to consider lenders with longer approval times.

Assess your financial situation and urgency of need to determine the ideal approval time for your circumstances. While some loans, like credit card applications, may be processed swiftly, others, such as mortgages, might have longer processing times.

It’s essential to understand that each lender has its own processing times based on their internal procedures and applicant requirements.

By evaluating your specific needs and timeline, you can choose a loan product with an approval time that aligns best with your situation, ensuring timely access to the funds you require.

6. Repayment Considerations

When considering a personal loan, it’s crucial to carefully assess the repayment terms to ensure they align with your financial capabilities and goals.

Here’s why these considerations matter:

Monthly Installments

Evaluate how much you’ll need to repay each month. Larger loan amounts typically translate to higher monthly installments. Can you comfortably afford these repayments?

When evaluating your ability to afford monthly installments, it’s essential to conduct a thorough assessment of your finances.

Consider all sources of income and ensure that after deducting necessary expenses and setting aside funds for unexpected costs, you still have enough to comfortably cover your loan repayments.

This assessment helps prevent financial strain and ensures you can meet your obligations without compromising your overall financial stability.

Extending the repayment period can indeed reduce the burden of monthly installments. However, it’s crucial to understand the long-term implications of this decision.

While smaller monthly payments may seem attractive initially, extending the repayment period typically results in paying more interest over time.

Therefore, carefully weigh the trade-offs between lower monthly payments and the total cost of borrowing to determine the most suitable repayment period for your financial situation and goals.

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Automatic Withdrawals

Determine if you’re responsible for depositing monthly repayments or if the lender requires automatic withdrawals. Consider if the lender offers reduced interest rates for automatic deductions.

Automatic withdrawals offer convenience and can help ensure timely payments, reducing the risk of late fees and negative impacts on your credit score.

However, it’s essential to manage your finances effectively to avoid potential overdraft fees or insufficient fund charges.

Maintaining a buffer in your account and staying on top of your expenses can help mitigate these risks and ensure smooth loan repayment.

Some lenders may offer incentives such as lower interest rates for borrowers who opt for automatic withdrawals. Take advantage of these benefits if available, as they can help you save money over the loan term while simplifying the repayment process.

Are there any Penalties for Early Repayment?

Understand if there are penalties for repaying the loan before its term ends. Some lenders charge fees to compensate for lost interest earnings.

Early repayment penalties can significantly impact the overall cost of credit and should be carefully considered when planning your repayment strategy.

While clearing the loan ahead of schedule may seem financially prudent, the presence of early repayment penalties can diminish the potential savings.

Evaluate your financial situation and future plans to determine the likelihood of early repayment and assess whether the benefits outweigh the associated costs.

If early repayment is a possibility, look for lenders that offer flexible terms or minimal penalties to avoid unnecessary expenses.

By delving deeper into these repayment considerations and understanding their implications, you can make informed decisions that align with your financial goals and ensure a smooth and manageable loan repayment experience.

7. Cost of Credit

When it comes to selecting a personal loan, one of the most critical factors for you to consider is the cost of credit. This refers to the additional amount of money you’ll end up paying on top of the loan principal by the time you’ve fully repaid the loan.

For example, if you borrow Ksh1 million and end up paying back a total of Ksh1.35 million, then the cost of credit in this scenario is Ksh350,000. Ideally, you’ll want to opt for personal loans with the lowest cost of credit to minimize your overall expenses.

The cost of credit is influenced by the following factors:

Interest Rate

When it comes to your personal loan, the interest rate plays a significant role in determining its overall cost.

Even slight differences in interest rates can lead to substantial variations in the total cost of credit, particularly for long-term loans. Therefore, it’s crucial for you to pay close attention to this aspect.

For example, if you borrow Ksh1 million with a 12% interest rate and a 5-year repayment term, you’ll repay approximately Ksh1,335,000 in total, excluding additional charges and fees.

However, if you opt for the same loan amount and repayment term but with a 15% interest rate, your total repayment would be approximately Ksh1,427,000—a difference of Kshs 92,000.

To keep your cost of credit in check, it’s essential to shop around and compare lenders offering the lowest interest rates for your desired loan amount.

Furthermore, consider how the lender applies interest. Some may charge a flat interest rate, applying monthly interest to the entire loan amount. Others may use a reducing balance method, where interest is applied to the outstanding loan amount.

Interestingly, a higher interest rate on reducing balance could sometimes be more affordable than a lower interest rate on a flat basis.

Therefore, it’s vital to calculate the total cost of credit for each lender based on their interest rate and application method, rather than solely comparing interest rates.

Additionally, be aware that lenders may adjust the interest rate based on factors such as the loan amount, your credit history, and the loan term.

Taking these factors into account ensures you make a well-informed decision that minimizes your cost of credit in the long run.

Application Fees

When you apply for a loan, some financial institutions may ask you to pay a small flat fee as an application fee. This fee is non-refundable and must be paid regardless of whether you qualify for the loan or not.

Although the application fee is typically modest (ranging from about Ksh500 to Ksh5,000 depending on the loan amount), it can still contribute to the overall cost of credit. This is particularly true if you apply for multiple loans that you ultimately don’t qualify for.

The good news is that there are lenders who do not charge application fees, helping you save on upfront costs when obtaining a loan.

Origination Fees

Origination fees are a common charge imposed by lenders. This fee is typically applied once your loan application is approved and the funds are transferred into your account.

The way origination fees are handled varies among lenders. Some deduct these fees directly from the loan amount deposited into your account, while others include them in your monthly payments.

Usually calculated as a percentage of the total loan amount, origination fees typically range between 1% and 6%.

For example, if you’re applying for a Ksh100,000 personal loan with a 3% origination fee, you’ll be charged Ksh3,000 as origination fees.

Late Payment Fee

Late payment fees are a standard charge imposed by nearly all lenders whenever you miss your monthly payment deadlines. These fees serve as a deterrent, encouraging borrowers to prioritize timely repayments.

Late fees may be structured as either a flat fee or a percentage of your monthly installment. Additionally, some lenders may impose late payment fees for each day that passes beyond the due date, potentially accumulating significant charges.

Given that late payment fees are a common practice among lenders, the most effective way to avoid incurring these charges is to ensure you make your payments punctually.

Loan Insurance

Loan insurance may be required by some lenders to protect against the risk of non-payment in case you lose your source of income due to factors like unemployment, injury, illness, or death. Other lenders may offer it as an optional add-on rather than a mandatory requirement.

The cost of personal loan insurance typically amounts to less than 1% of the loan amount. However, you can potentially avoid this expense by opting for a lender that does not mandate loan insurance.

Early Payment Penalty

As mentioned before, you’ll want to be aware of early payment penalties, which can increase your cost of credit if you pay off your loan before its term ends.

To lower your cost of credit, it’s crucial to calculate the total repayment amount from various lenders, factoring in interest rates, fees, and charges. This way, you can choose the lender that best fits your needs and financial situation.

Excise Duty

Excise Duty has been a significant factor affecting your personal loan transactions. The Finance Act 2018 introduced a 20% excise duty on all bank transactions, including those involving personal loans.

Consequently, lenders adjusted the total cost of credit upward to accommodate this 20% excise duty, leading to an increase in the overall cost of credit.

However, there have been recent developments regarding Excise Duty. In the Finance Bill 2020, the Treasury eliminated the 20% excise duty on bank loan fees.

This removal could potentially result in banks reducing the cost of credit, as they are no longer required to factor in this duty.

Nonetheless, the 2020 Bill introduced a new 20% tax on loan processing fees or any other fees and commissions earned in relation to a loan.

If approved, this tax would introduce a pseudo-excise tax component in the total cost of credit, potentially impacting your borrowing costs.

Loan Tenure

When considering a personal loan, one crucial factor to think about is the loan tenure, which refers to the duration within which you must repay the loan.

Many borrowers often assume that opting for longer repayment periods is advantageous because it leads to lower monthly repayments.

However, it’s essential to recognize that extending the loan repayment period results in paying more interest over time, thereby increasing your overall cost of credit.

For example, if you borrow Ksh1 million with a 14% interest rate and a 2-year repayment period, your monthly payments would be approximately Kshs 48,000, with a total payment of about Kshs 1,152,000.

In contrast, if you choose the same Ksh1 million loan with the same 14% interest rate but extend the repayment period to 5 years, your monthly payments would decrease significantly to around Kshs 26,000.

However, the total payment would substantially increase to approximately Kshs 1,396,000—a difference of Kshs 244,000.

Therefore, it’s crucial to strike a balance between monthly installments that you can comfortably afford and opting for a shorter loan tenure to minimize your overall cost of credit.

Final Thoughts

Personal loans can be instrumental in achieving goals but selecting the right one requires careful consideration.

But, if you overlook the above considerations, you may end up with a loan that doesn’t align with your needs, leading to financial strain.

Remember, each lender and loan product differs, so it’s essential to assess your needs and compare options thoroughly.

Consider the following factors before applying for a loan and make an informed decision to secure your financial well-being.

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7 Key Factors to Consider Before Applying for a Personal Loan in Kenya