The phrase “personal loan” strikes fear into the hearts of many. For some, personal loans are a challenging proposition; for others, they are simply out of their reach. The unfortunate truth is that not everyone can qualify for a personal loan. Your credit score, income, and other financial factors all play a role in whether you can get one. And if you do meet the eligibility requirements, you may still have to jump through numerous hoops to get that money.
Unfortunately, there aren’t any simple answers for how to get a personal loan in Kenya. Each lender has different standards for approving loans and will look at your specific financial situation when determining eligibility and interest rate. But let’s take a step back from the doom-and-gloom and see if we can find some light at the end of this tunnel…
What is a personal loan?
A personal loan is a type of loan that individuals can take out to meet their short-term or long-term financial needs. Personal loans can be both secured and unsecured. They can be used for a variety of purposes, including debt consolidation, debt refinancing, home repair, medical expenses, and much more.
Not all lenders offer personal loans, but those that do usually provide borrowers with a wide range of loan terms and repayment options. Personal loans are typically set up with a fixed interest rate over a set amount of time. Once you’ve repaid your loan in full, you’re free to walk away from the debt, though it’s not uncommon for lenders to give you an option to extend the loan if you choose to do so.
When to take a personal loan
Personal loans are a valid source of funding that may be beneficial for several purposes. With certain personal loans, you are not restricted in how you spend the money—this may be beneficial or detrimental, depending on how you look at it. Despite this, there are some good reasons to take a personal loan, as well as some bad reasons. Taking a personal loan for the wrong reasons may lead to adverse financial consequences, so you should be careful when doing so.
personal loans can be a good choice because of the following reasons:
- Investing in your self-improvement is possible with a personal loan. You can use the money to pay for an online course to enhance your abilities or start a business, for example.
- You might buy an appreciating asset with your loan. You might take out a loan and buy a piece of land to earn a profit, for example.
- Personal loans can also assist you to cover a medical emergency by providing you with the money you need. It can be used to cover medical bills for you or a loved one if you or a loved one has a medical emergency.
- You can get a lower interest loan and use it to pay off your current loan to get rid of your debt. It’ll allow you to get out of the debt faster due to the lower interest rates.
Some wrong reasons for taking a personal loan include;
- If your spending exceeds your revenue, taking a personal loan to cover your expenses is usually not a good idea, as you are likely to get in financial trouble. Taking monthly loans to pay for your regular expenses can be a lousy choice if you find yourself doing so.
- It is a terrible idea to take out a loan to purchase something you cannot afford unless the purchase will result in more income for you in one way or another. Besides burdening you with debt, taking out a loan to purchase something you cannot afford will also substantially increase the price of what you’re purchasing because of the interest.
- Taking out a loan for vacation is also a bad idea. If you don’t have the money for a vacation, it’s better to save up until you do or change your destination to one where you can afford it. If you take a personal loan to finance a vacation, you will be saddled with debt for something that isn’t a critical necessity.
Types of personal loans
There are two major categories of personal loans in Kenya – unsecured and secured personal loans.
Unsecured personal loans
You can access a large amount of money with an unsecured personal loan as long as you have sufficient income. In case of nonpayment, you use an asset as security to guarantee the loan with a financial or lending institution. An unsecured personal loan is one where you obtain funds based on your income level. Because these loans are considered higher risk by lending institutions, they are often priced at a higher level.
Unsecured personal loans include;
Short term loans
These are unsecured personal loans that have very short repayment periods, usually between 1 and 60 days. These loans are perfect for covering emergencies as you wait for your next paycheck.
Short-term unsecured loans are relatively easy to access, they do not require lots of documentation, and they have fast approval times (note that app-based loan providers may be scrapping personal data of your device as an alternative to formal paper documentation). The trade-off, however, is that they only give access to relatively low amounts of money, while their interest rates and late fees are significantly high
Salary Advance Loans
This is an unsecured personal loan facility that allows you to access your salary or a portion of it before payday. To be eligible for a salary advance loan, you need to have a salary account with the lending institution. Salary advance loans usually have very fast approval times and subsidized interest rates.
Salary checkoff loans
Salary checkoff loans refer to the loans whose repayment is directly taken from clients through their monthly salary. This repayment is done automatically when the time for repayment arrives. In this way, it is simpler to implement and administer. In this case, it is provided to employees whose employers are partnered with the lending company, Mwananchi credit ltd.
Secured personal loans
A secured loan is a loan in which you pledge collateral, financial assets like a house or a vehicle, as payment to the lender if you don’t repay the loan. A basic concept is behind secured loans. By accepting collateral against a secured loan, lenders encourage borrowers to repay on time. It’s a strong motivator to repay the loan and avoid repossession or foreclosure, especially if you lose your home or car.
Secured personal loans include;
These are personal loans that are secured with your car as collateral. When you take a logbook loan, you will still retain use of your car while repaying the loan, but the lending institution will hold onto your logbook, hence the name.
In case you default on the loan, the lending institution has the right to take possession of your car and sell it to offset your loan balance
These are personal loans that allow you to borrow against your assets like title deed loans. In this case, the lending institution holds the rights to your assets until you clear the loan. Examples of assets that you can use as collateral for asset loans include buildings, land, and equipment.
Things to consider before taking out a personal loan
Getting a loan that doesn’t fit your financial needs can have a detrimental impact on your finances. For example, you may get a loan with really high-interest rates that make the loan too expensive for you to repay. It’s thus critical to be well-informed before taking out a personal loan and comparing the available choices so you can make the right choice.
Below are some considerations you need to keep in mind before getting a personal loan;
We at Mwananchi Credit don’t loan out money to everyone who walks through their doors. We have some criteria that we use to determine whether you qualify for a loan or not.
Before starting your loan application process, you’ll therefore need to check and confirm whether you meet our minimum requirements to qualify for the loan. Some of the eligibility requirements for personal loans include:
- Income verification: We will require you to provide some documents to prove that you have a stable income and that you meet their minimum monthly income requirements. Having a stable income helps us to determine whether you can pay back the loan. In most cases, you’ll be asked to provide a pay slip if you are employed, or bank statements if you are self-employed.
- Collateral: If the loan product you are applying for is a secured loan, you’ll need to have an asset that you can use as collateral against the loan.
- CRB clearance certificate: We will also require you to provide a clean credit report from a Credit Reference Bureau showing that you do not currently have a non-performing loan.
- History with the lender: In some cases, we also base loan eligibility on the length of time you have had an account with them. This requirement locks you out if you did not previously have an account with the lender.
You can easily find out eligibility requirements for personal loans by checking out the Mwananchi Credit website, making a phone call to us, or visiting our physical locations in Kenya.
Interest Rates And Additional Fees
You should know how much the loan will cost you before you get one. It is important to know the interest rate on a loan in addition to the total amount of interest, any additional fees, and the repayment terms. Interest rates vary depending on the nature of the loan.
Secured loans have lower interest rates than unsecured loans. In addition to credit report fees and application fees, there may be additional costs associated with unsecured loans. You should be aware that repaying loans on time is critical in keeping down interest rates and preventing default.
This refers to the details of the specific loan facility you are considering. Some things to consider here include:
- Minimum and maximum amount: This is the minimum and maximum amount of money that you are eligible to access with that loan facility. Before getting the loan, make sure that the amount you are eligible for is enough to cover the needs that drove you to take the loan.
- Minimum and maximum tenure: This refers to the amount of time given for you to repay the loan. Note, however, that longer repayment periods are not always better. While a long repayment period translates to lower installments, it also means you’ll also have to pay a higher cumulative interest amount.
- Application approval time: This refers to the time it takes for the lender to process and approve your loan application. Ideally, you should go for loan facilities with faster approval times like Mwananchi Credit. However, this will ultimately depend on the reason you are applying for the loan.
The repayment details take into consideration the lender’s requirements when it comes to making payments, as well as available options that could make repayment more convenient for you. Some things to look at here include:
- Repayment frequency: How often are you supposed to make the payments? While most personal loans use monthly installments, some require you to make weekly payments, while others allow you to make a lump sum payment at any time within the life of the loan. You also need to consider if there are any penalties if you miss an installment.
- Early repayment: What happens if you clear the loan before the agreed repayment period? Some lenders will give you a discount for clearing your loan early, while others could charge you an early payment penalty because they are going to be losing out on interest.
- Repayment method: Which options does the lender give you for making your loan payments? Will, they auto-deduct the monthly installment from your account every month? Do they allow you to make the payment via M-pesa? Can you make the payment via cheque? Here, you want to go with a lender who has a payment method that is convenient for you.
Risks of taking a personal loan
Failure to make payments
When taking a loan, everyone has a plan on how they are going to pay back the loan. Unfortunately, things don’t always work according to plan
If you fail to make your payments, this can have severe consequences for you. You may get listed with the Credit Reference Bureau (CRB), you could get sued, and in the case of a secured personal loan, you could end up losing your assets, such as a house, a car, or a parcel of land.
Getting in the Way of Other Priorities
Using a personal loan may restrict your other financial objectives, such as saving money to buy a house or save for retirement, because a portion of your income will need to be used to pay down the loan.
Raising Your Debt-To-Income Ratio
Taking a personal loan raises your debt-to-income ratio, which is the ratio of your income that goes towards servicing debt. A high debt-to-income ratio affects your ability to borrow in the future when you need it.