9 Types of Personal Loans in Kenya

Personal loans offer a financial lifeline in times of need.

If you are thinking of taking a personal loan to cover some expenses, you’ll need to consider the different types of personal loans available and decide which one is most suitable for you.

To help you, I’ve reviewed the different types of personal loans available in Kenya.

The different loan types are divided into two major categories:

Unsecured personal loans
Secured personal loans.

Keep reading to understand the distinctions between them and find the loan type that best suits your needs, ensuring you make a confident and informed decision.

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Unsecured Personal Loans

When it comes to loans in Kenya, there are various types available to suit different needs. One common option is unsecured personal loans.

With these loans, you don’t need to put up any assets as collateral. Instead, lenders assess your creditworthiness and income to determine if you qualify.

If you’re listed with the Credit Reference Bureau (CRB), getting approval for an unsecured loan might be challenging due to perceived high default risk.

Your income plays a crucial role as lenders use it to calculate your debt-to-income ratio, gauging your ability to repay.

Unsecured personal loans offer accessibility, especially for individuals who are just starting and don’t own assets. However, they often come with higher interest rates and lower loan amounts due to the increased risk for lenders.

It’s important to note that even though these loans don’t require collateral, lenders still have recourse if you default. They may take legal action or involve collection agencies to recover the debt.

If you’re considering unsecured personal loans in Kenya, here are some options to explore:

Check-off loans
Non-check-off loans
Payday loans
Cosigned and guarantor loans
Overdrafts
Mobile loans

1. Check-Off Loans

If you’re formally employed in Kenya, you might want to consider check-off loans as a viable option.

These loans are specifically designed for employees like you, not for those who are self-employed or working in the jua kali sector.

One notable aspect of check-off loans is that repayment happens seamlessly – your employer deducts the loan installments directly from your salary and sends them to the lender.

To qualify for a check-off loan, your employer must have a memorandum of understanding (MOU) with the lender. These loans are typically accessible to:

Civil servants
Parastatal employees
And those in state corporations.

Employers often establish MOUs with lenders to provide check-off loans as an attractive employee benefit, aiming to attract and retain talent effectively.

The loan amounts can vary significantly, ranging from as low as Ksh5,000 to substantial sums, depending on your income level.

Thanks to the arrangement between your employer and the lender, approval for a check-off loan is usually swift. Additionally, the application process is streamlined, you don’t necessarily need an existing account with the lender, and the repayment terms are flexible.

Since repayments are automatically deducted from your salary and transferred to the lender, late payments are seldom a concern for you.

2. Non-Check-Off Loans

When it comes to non-check-off loans in Kenya, there are a couple of key distinctions you should be aware of compared to check-off loans.

Firstly, unlike check-off loans where repayments are automatically deducted from your income, with non-check-off loans, it’s your responsibility to ensure timely repayment. Missing payments could result in late penalties, so it’s crucial to stay on top of your repayment schedule.

Secondly, unlike check-off loans which require your employer to have an MOU with the lender, non-check-off loans don’t have this requirement.

This means they’re accessible to a broader range of individuals, including self-employed individuals and those outside formal employment.

All you need to demonstrate is a consistent income source. Additionally, many lenders may require you to maintain an active account with them for a specified period.

Non-check-off loans offer flexibility in borrowing amounts, ranging from small sums to substantial sums based on your income.

However, it’s important to note that these loans typically carry higher interest rates compared to check-off loans due to the increased risk for lenders.

So, if you’re considering non-check-off loans, ensure you’re prepared to manage your repayments diligently and factor in the potentially higher interest rates into your financial planning.

3. PayDay Loans

If you’re facing unexpected expenses and need quick cash until your next payday, payday loans might be a viable option for you.

Also known as cash or salary advance loans, these short-term loans can help bridge financial gaps until your next paycheck arrives.

One important step before obtaining a payday loan is giving the lender advance authorization to withdraw the owed amount, along with fees and interest, from your account once your salary is deposited. Alternatively, you might need to provide a post-dated check for the owed amount.

The main advantage of payday loans is their minimal qualification requirements, making them accessible to most individuals. However, they typically offer access to smaller amounts of money and come with high-interest rates and late payment penalties.

When approving a payday loan, lenders often prioritize their ability to collect the owed funds rather than ensuring that you can comfortably manage repayment alongside other financial obligations. Consequently, if not managed carefully, payday loans can lead to a cycle of debt.

For example, if your monthly income is Ksh70,000 and you have a payday loan of Ksh50,000, the lender will deduct the owed amount, plus interest and fees, once your salary is deposited.

This could leave you with insufficient funds for your expenses, potentially leading you to take out another payday loan, thus perpetuating the debt cycle.

4. Cosigned And Guarantor Loans

If you’re facing challenges with poor or nonexistent credit history and lack collateral for a loan, cosigned and guarantor loans could be the answer you’re looking for.

When lenders perceive you as a risky borrower due to your credit history or lack of collateral, having someone with a strong credit history vouch for you can significantly improve your chances of loan approval. This individual could be a trusted friend, family member, or even a colleague.

By agreeing to cosign or guarantee your loan, they’re essentially taking on the responsibility to repay the loan if you’re unable to meet your obligations.

This provides reassurance to the lender and increases your likelihood of getting approved for the loan.

Cosigned and guarantor loans offer the advantage of accessing funds that you wouldn’t qualify for independently. They also allow you to borrow larger amounts than you might otherwise be eligible for.

However, it’s important to consider the drawbacks. These loans typically come with higher interest rates compared to standard loans.

Moreover, if you default on the loan, your guarantor will be obligated to repay it, potentially straining your relationship with them.

So, while cosigned and guarantor loans can be a valuable financial tool, it’s essential to weigh the pros and cons carefully before proceeding.

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5. OverDrafts

Consider overdrafts as a safety net provided by your bank or financial institution, allowing you to withdraw more funds than what’s currently in your account.

Imagine this scenario: you urgently need Ksh30,000, but your account only holds Ksh20,000.

With an overdraft facility in place, you can still withdraw the full Ksh30,000, even though your balance falls short. In this case, the additional Ksh10,000 is your overdraft.

Each time you use the overdraft, you’ll incur interest on the overdraft amount (like the Ksh10,000 in our example) along with a fixed overdraft fee. Typically, your financial institution will set a maximum limit for overdrawing on your account.

Overdrafts offer several benefits. Firstly, you can access the overdraft multiple times without having to repay it fully each time.

For instance, with a Ksh50,000 overdraft limit, you could withdraw Ksh10,000 today and another Ksh20,000 tomorrow, without clearing the initial Ksh10,000 first.

Moreover, once approved, you can continue to access this credit line without needing to reapply. Overdrafts also enable you to borrow only what you need, keeping your costs manageable.

However, keep in mind that the financial institution reserves the right to demand repayment of the overdraft at any time. Additionally, maintaining a current account with the lender is typically a requirement for eligibility.

A well-known example of a low-level overdraft facility is Safaricom’s Fuliza MPESA, which allows you to make transactions even when your MPESA account balance is insufficient.

6. Mobile Loans

Mobile loans offer a straightforward way to access credit directly from your mobile device, with funds disbursed straight to your mobile wallet.

Typically accessed through a mobile app on your smartphone or via USSD, these loans come with short repayment terms, usually spanning from 1 to 30 days.

Initially, mobile loans gained popularity in Kenya thanks to telecommunication companies and various unregulated digital lenders. However, recognizing the industry’s potential, even banks and major financial institutions have entered the mobile lending arena.

One of the most significant advantages of mobile loans is their sheer convenience. With just a mobile phone and network connection, you can apply for a loan from anywhere. Plus, funds are usually disbursed instantly to your mobile wallet, granting you immediate access.

Another benefit is their minimal qualification requirements. No collateral or proof of income is needed, unlike traditional lenders. Additionally, having a formal bank account isn’t a prerequisite, making these loans accessible to almost anyone.

Furthermore, mobile loans offer you a plethora of options. Unlike traditional lenders where you might be limited to one or two loan products, there are numerous mobile loans available for you to choose from. This allows you to compare and select the most suitable option.

However, it’s essential to be cautious as mobile loans often come with high interest rates. Some mobile lenders have also been known for predatory practices, such as data harvesting.

Therefore, it’s crucial to carefully review the terms and conditions of these loans and monitor the permissions granted to these lenders by the apps you use.

Secured Personal Loans

Secured personal loans require you to offer something valuable as collateral to secure the loan. With an asset backing the loan, lenders face less risk, as they can sell the collateral if you default.

Secured personal loans offer distinct advantages over unsecured ones. Due to the reduced risk, they typically come with lower interest rates. Additionally, securing a loan makes it easier to access larger sums of money and negotiate longer repayment terms.

However, it’s important to recognize the increased risk for you as the borrower. If you fail to repay the loan, you could lose the collateral you provided.

In Kenya, there are various types of secured personal loans available to you, including:

Logbook loans
Asset loans
Pawn shop loans

1. Logbook Loans

If you’re in need of quick cash, logbook loans offer a solution by allowing you to borrow against the value of your vehicle. Whether it’s a car, lorry, bus, motorcycle, or any other vehicle, you can leverage its worth to secure a loan.

When you apply for a logbook loan, the lender will assess the value of your vehicle to determine the maximum amount you can borrow, usually as a percentage of its worth.

This means you could potentially access anywhere from about Ksh50,000 to millions of shillings, depending on your vehicle’s value.

Repayment terms for logbook loans vary, ranging from one month to several years, depending on the borrowed amount and the lender’s terms.

Logbook loans are great because:

They provide easy access to funds while allowing you to retain the use of your vehicle as usual.
They typically have swift application approval processes.
They come with minimal qualification requirements, making them accessible to anyone with a vehicle, regardless of credit history.

So, if you need quick cash and own a vehicle, logbook loans could be a viable option for you.

2. Asset Loans

Asset loans offer you the opportunity to leverage your assets as collateral for a loan, making them an attractive option when you need to borrow a substantial sum of money at favorable interest rates.

You can use various types of assets as collateral for a personal asset loan, including:

Your home
Commercial buildings/properties
Cash in a certificate of deposit account
Cash in a savings account
Bonds
Stocks
Fine art
Jewelry
Antiques
Precious metals
Collectibles
Insurance policies
Mutual funds
Money market accounts

The amount of money you can borrow, along with the interest rates and loan terms, will depend on the type and value of the asset you provide as collateral.

Typically, highly liquid assets like cash in savings accounts, bonds, stocks, and money market accounts attract lower interest rates compared to less liquid assets such as property, art, and antiques.

So, if you have valuable assets and need access to funds, asset loans can provide you with a favorable borrowing option.

3. Pawn Shop Loans

Pawn shop loans, often known as ‘instant loan on items’ providers or shylocks in Kenya, offer a quick solution when you urgently need money, but they come with a hefty price tag.

To secure a pawnshop loan, you’ll need to offer a valuable item as collateral to the pawnbroker or shylock.

Electronics and household items like TV sets, laptops, refrigerators, home theaters, bicycles, phones, and gaming consoles are commonly accepted as collateral.

The shylock will assess the value, condition, and resale potential of your item to determine the loan amount, typically ranging from 25% to 70% of the expected resale value.

You may also need to provide proof of ownership or purchase for the items to prevent dealing with stolen goods.

Once you agree on the loan terms, you’ll receive the loan amount along with a ticket detailing the owed amount, repayment period, and interest rate. This ticket is crucial for reclaiming your item after repaying the loan.

Pawn shop loans usually have short repayment periods, typically one week to two months. Extensions are possible but come with higher interest rates. Failing to repay the loan results in the pawnbroker selling your item to recover their funds.

Pawn shop loans have minimal qualification requirements; your income, credit history, or ability to repay aren’t considered.

As long as you have something valuable, you can secure a loan, making it suitable if you lack access to formal personal loans.

However, it’s essential to note that pawn shop loans carry very high interest rates, making them an expensive way to obtain personal credit.

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Final Thoughts

Now you have an idea of the diverse array of personal loan options available in Kenya.

Each type of loan offers unique benefits, ranging from convenience to lower interest rates, and considerations.

Remember to assess factors like interest rates, repayment terms, and eligibility criteria to ensure a successful borrowing experience.

With this knowledge, you’re empowered to make informed decisions and navigate the personal loan landscape effectively.

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9 Types of Personal Loans in Kenya