In the current economic climate, where money is hard to come by, borrowing has become a necessity. Many Kenyans are finding it difficult to balance incomes at the end of the month as their salaries and wages remain stagnant, despite the growing inflation.
A report in 2014 revealed over 90% of Kenyans earned less than KES 400,000 while almost 50% of them take home less than KES 10,000. This scenario has not only plunged Kenyans deep into debt but has also led to an increased uptake of loans and other forms of credit for a variety of reasons.
Some of the reasons may include fulfilling long-term goals, covering short-term problems or emergencies, paying urgent debts and simply accessing credit for consumption.
Kenya has become a society where asking one’s family and friends for money is considered embarrassing and borrowing from a financial institution is seen as the better option. Most financial institutions today allow you to access large amounts of cash almost immediately.
The Kenyan financial sector has introduced new borrowing channels over the years that have easy access to mobile loans, overdrafts and credit cards; as a result making it tempting for many potential borrowers. That being said, being in debt is not an ideal situation and it would be important for you to consider certain realities before obtaining credit.
Things You Should Know before Taking Out A Loan
The most common type of credit available to borrowers in Kenya is a loan. People borrow loans for a variety of reasons and each lender has his terms and conditions concerning repayment plans and interest rates. For first timers, taking out a loan for personal use or business reasons can be intimidating.
However, most lenders will want to assess your ability to repay the loan by checking out your current financial situation and learning more about you. When applying for a loan it is important for you to build trust with the lender and demonstrate your ability to repay the full debt at maturity.
Here are a few things you should consider before making a loan application:
- Analyze your financial position and cash flows: You need to have a full picture of your financial position and cash flows, be it personal or enterprise related so as to determine if you can meet the loan payments. Your financial position will be used by banks or other financial institutions, to determine how well you shall be able to pay off the loan. On the other hand, understanding your cash flow can help you to figure out what amount you can borrow and pay back comfortably.
- Know your credit score: Consider your credit score before you start applying for a loan. Your credit score will determine whether you will be able to access additional credit because it shows how well you have been able to pay off your debt in the past. If you have a low credit score then try and raise it before you apply for a loan. To improve your credit score you need to finish paying previous loans and get into the habit of making your payments in time.
- Examine your reasons for getting the loan: While it is vital to have covered all your bases in regards to financial information when applying for a loan, it is also essential to have strong and credible reasons for taking out one. These reasons will have to be shared with your lender during the application meeting, hence ensure you are able to respond to their queries, in a clear, concise and convincing manner that leaves no doubts about your need for the loan.
- Have a concrete repayment plan: The reason for the loan alone will not get it approved; your application has to be backed by a strong argument and a plan for paying off the full amount. Such a plan has to be formulated after you settle on a lender from whom you want to provide the loan. For example, if the purpose of the loan is to set up a business then make sure you include the business plan in your application documents.
- Determine what are the costs associated with the loan: Usually, when applying for a loan, many people plan according to the amount they have in mind. As a result, potential borrowers end up signing the agreements with no idea what the net take home amount will be. Every loan application has an appraisal fee or service charge tagged on it, which ranges from between (3-9)% of the total amount being applied for as well as an insurance fee. Therefore it is important you inquire from your lender on all charges associated with the loan.
It is advisable for you to engage with as many banks as possible to get the best loan package at the most competitive rate. Take your time and read the loan agreements carefully and seek clarification on areas you are not certain about. Remember, if you default on the loan it is your future at stake so make sure the agreement is one you can live with.
To make a successful loan application the key is to ‘do your homework.’ This way you minimize your chances of being turned down by the lender, and you find ways to sweeten the deal.
Have you taken out a loan before? What was your experience? Based on reading this article, how would you approach your loan application in the future? Share your thoughts with us below.
- What Is A Loan?
- What You Should Know Before Taking A Loan
- Using Your Credit Score To Negotiate For Cheaper Loans