What you need to know:
- Ensure that you understand the terms of the loan and how the interest rate is charged.
- Also identify any hidden charges that the lender might not have told you about.
The majority of loans advanced by banks, Saccos and other financial institutions went to personal and household use, data from the Central Bank of Kenya’s Bank Supervision Annual Report 2020 shows.
This indicates that scores of Kenyans are relying on loans to meet their daily needs, which means that now more than ever, borrowers need useful information on how to sound out the best lenders, how to manage their loans once disbursed, and how to go about repaying them.
How to find the best lender
Samuel Gathecah, a financial expert who runs Pearl Insights, says borrowers should first identify the best possible potential lenders based on their interest rates, requirements and fees and charges, before they open an account with the lender. This information, Gathecah explains, enables you to make an informed choice.
“As a borrower, you need to identify your possible lender when opening an account early on to tell whether they are a good fit, as well as the documentation that is required before you are given the loan,” he says.
“Different lenders have different conditions attached to their loans. For instance, some will tell you that you must have operated an account with them for a period of one year, while others will ask for collateral ranging from land title, vehicle logbook or machinery. You must put these into consideration when approaching them to make sure that you qualify,” he adds.
But the expert notes that borrowers, whether they are borrowing to fund a business or for personal use, have friends, colleagues and associates who play a crucial role in referring them to an institution that offers loans at friendly rates.
Another factor to consider is the speed at which the lender processes the loan.
Some lenders, he says, can take weeks to consider an application while others can process it within days.
“Once you make sure that you qualify for a loan, you need to determine how long the lender will take before forwarding the loan to your account. You will find that once you complete the application process, some lenders will take a long time before informing you about the status of your application, which will work against you if you need to use the money to pay a hospital bill, for instance,” Gathecah says.
Of great importance, he advises, is to take note of not just the interest rate charged on the loan, but also other charges such as application fees and other hidden fees.
“You must make sure that you understand the terms of the loan and how the interest rates are charged, whether it is monthly or yearly, and if it is on a fixed rate or reducing balance. Also be keen to sniff out any hidden charges that the lender might not have told you about. This will enable you to know the exact amount you get in your account and the amount you will be required to pay,” he says.
How to use your loan
Once you have received the loan in your account, the financial advisor cautions that you must avoid using the money for a purpose other than that you intended.
“If you had borrowed so that you can stock your shop, then you should ensure that you buy the needed stock, which will enable you to earn more and be in a position to repay the loan. If you direct the funds to other spends such as entertainment, you are in trouble,” he warns.
“Sometimes people borrow money to boost their businesses but end up spending the money elsewhere, mounting pressure on them when the obligation falls due,” Gathecah says.
Ensure that you tighten your spending to ensure that you utilise the loan as well as possible – start by making a list of priority spending areas starting with the most important to the least important.
This, he says, ensures that even if the funds get exhausted along the way, the most important needs will have been taken care of.
How to repay your loan
The financial expert notes that once you get the loan, make its repayment just as important as paying for rent, food and other necessities, to ensure that you meet your loan obligations.
This planning, he says, will also include properly managing the receipt side of business if the funds were used for business purposes.
Gathecah adds that businesses need to also be more aggressive on sales to meet the extra financial obligation, in this case a loan to pay.
In case of economic disruptions such as the one triggered by the Covid-19 pandemic, which has hit businesses hard, Gathecah advises approaching your lender to discuss the status of the loan and negotiate for a settlement or a restructure with their bank, but under no circumstances, he cautions, should you consider not paying back your loan.
“Make a case with your banker on how your personal or business income has been affected, then give them an offer, not to wish your obligation away, but to perhaps get a lesser instalment so that you are able to pay without feeling like a defaulter,” he advises.
Cultivating a cordial and trustworthy relationship with your lender, he concludes, puts you in pole position to be given another loan should you need one again.