What to ask before taking personal loan

In today’s hard financial times when money has become scarce and low in purchasing power, borrowing has certainly become inevitable.

A recent Ipsos poll showed that one in every four Kenyans has contemplated suicide due to the rising cost of living.

A previous report shocked many that 93 per cent of Kenyans earn less than Sh40,000 while almost half of them take home less than Sh10,000. 

These scenarios have not only pushed Kenyans down the pit of debt but also made them to diversify the reasons for borrowing from fulfilling long-term goals to fixing short-term emergencies or simply accessing credit for consumption or paying pressing debts.

“We live by debt, it is hard to balance income at the end of the month when you know very well that what you expect will all be swallowed in the debt,” says Caroline Achieng’ who works for a local supermarket in town. 

Borrowing from financial institutions is the fastest way to access a large amount of money that you cannot save over a period of time.

Many people also consider it more personal in a society where asking friends and relatives for money can turn out to be quite embarrassing.

The Kenyan financial market is also continuously opening borrowing channels with mobile money, credit cards and overdrafts becoming so easy to access that the temptation to borrow is just too high.

That be as it may, the pit of debt is definitely where you would not want to be found in.

It is worth considering certain realities before taking the jump to be a debtor. Here are some of them: 

What are the costs associated with the loan?

When applying for a loan, many people simply plan with the amount they are applying for in mind.

The urgency to get cash makes potential borrowers sign the loan forms without even knowing what the net take home will be.

Isabella Wambugu is a micro loan officer with a local bank in Nairobi, she says that borrowers simply say that they want a certain amount and ask for the monthly instalments.

“Customers will be seen in the banking hall after spending the loan to ask about the charges and the interest of the loan,” Ms Wambugu says. This group is just a few among the Kenyans who care to know after all. Others never even have an idea about what many call “the hidden charges.”

Every loan application has charges tagged on it.

Some banks may call it service charges or appraisal fees but the truth is that it ranges between three and nine per cent of the total amount of loan being applied for.

Some banks would deduct this amount in advance before disbursing the loan to you while others will load it over the principal borrowed and the interest in the repayment.

If you are applying for say Sh3 million loan, you may pay as much as Sh270,000 in processing fees alone.

Apart from the processing charges, banks normally insure the loans you take against death and or disability; again this one ranges from one financial institution to another.

“Banks have to keep safe and avoid the embarrassment of looking for relatives of the deceased to add salt to the wounds of people who have probably lost a bread winner,” notes Mr Richard Mwaniki, a private debt recovery consultant in Nairobi.

This fee is dependent on the period of the loan since it applies annually.

It is, however, charged at the processing stage, further reducing your take home or carefully loaded in the repayment structure but either way — you pay. That is the bottom line.

Loans are repaid with interest and since the figure is usually given in percentage per year, it rarely crosses the mind of the borrower how much he/she will return to the lender over and above the principal.

In 2011, when inflation went through the roof, many borrowers found their loans restructured because interest rates increased.

Many either did not understand it or just did not care to know why the repayment periods had become longer.

What is the timing of the loan? 

While planning to borrow, the purpose must guide your timing which will be crucial in determining how the money helps you anyway.

Loans in some circumstances may not be instant especially when collateral is used as security.

A title deed for example has many legal processes for its joint registration that may take between three weeks to one or even over a month to complete.

Banks will only lend you after the land is cleared as clean and safely registered under the borrower and the bank’s names.

If your purpose for the credit is time-fixed, you may end up getting the much needed cash when it is too late. As a consequence, you may end up misusing the money. 

The same applies when you rush to borrow before the time is ripe and as fate would have it, something unusual comes up to consume the money you intended to invest.

The next thing is that you may fall in repayment struggles and consequently lose an asset in the process.

A timing error will mean you never get value, for example, borrowing for a car or a machine whose value will depreciate by the time you complete repaying.

You will have simply gone through a borrowing and repayment process but the asset dies with the loan leaving you with no value in the end. 

Another aspect of time is tied on the repayment schedule. You must clearly know your income plans and relate it to the frequency of repayments, whether weekly, monthly or quarterly.

Agreeing to a deal that does not obey your income trend will land you in repayment hardship and make you look like a bad borrower who delays repayments.

Wait, one more thing... never rush to borrow when you are in a crisis. You will not only end up with the worst lender but also sign anything to get cash.

Net value versus alternative means

It is also worth asking yourself whether it is the best option available. Have you considered other ways of raising cash other than debt?

Is it a burden worth carrying? How much value will it add to you or your business?

These are crucial but mostly ignored issues that ought to cross your mind before you sign the dotted lines and commit to repay for a loan, sometimes for a period of even over 10 years.

Shopping for the best debt

• Prepare yourself. Before lending you money, a bank or other group will want to see a business plan and current financial statements. They’ll also check your personal credit history, so be sure your credit score is excellent.

• Shop for the best terms. If one bank wants to give you a loan, it’s likely another will, too and at a competitive rate. Just make sure to read contracts closely and ask the right questions to ensure you are being offered a better deal.

• Borrow only what you can afford. Avoid the temptation to borrow more than the absolute minimum you need, no matter how much you are qualified for.

• Debt isn’t evil, but it can be dangerous. Use it wisely, and it can give you a financial edge, providing the flexibility to seize opportunities you otherwise couldn’t afford and ones that could push your business to the next level.

• Always remember: The best debt is one that has been repaid.

    — Entrepreneur.com