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What you need to know about Personal loan borrowing

Personal loans are short-term loans taken by a borrower and are usually repaid on a monthly basis. They are usually unsecured and don’t need collateral for them to be issued.

Personal loans are normally for amounts from about 1,000 up to 100,000 with repayment terms from one to twenty-four months depending on the monthly charges you are willing to pay.

The amount you can borrow and the interest rate you’ll be offered will depend on:

  1. Personal circumstances. An emergency loan is likely to have a higher interest than a loan you are willing to wait for a week or two to get.
  2. your credit history. Your ability to repay a loan is a big factor in how much a lender is willing to offer you. The interest rate is always higher if your loan repayment history is poor.

When you take out a personal loan, the cash lump sum will be paid into your bank account. You’ll then repay it each month, plus interest, for the duration of the term. The lender and the bank might apply some fees to the final amount.

Personal loans are often advertised with low headline rates that can make them look very cheap — but you could be offered a higher rate if the lender believes you are a risk bet. Make sure you get a quote from the lender before you apply to ensure you get the right interest rate that you are comfortable with.

What to know before you start borrowing

A personal loan is different from a secured loan

With a secured loan, you’ll put something forward as security for the loan. This is usually your property. The lender can ultimately take possession of this asset if you don’t repay the loan.

With a personal loan, you are not required to offer anything as security for the money.

Personal loans also tend to be for shorter terms than unsecured loans, and for lower amounts.

Personal loan cooling-off period

When you take out a personal loan you have a 10-day cooling-off period from either the date the loan agreement is signed or when you receive a copy of the agreement, whichever is later.

If you cancel during the cooling-off period, and you have already received the funds you have up to 30 days to repay the money in full.

However, you’ll be charged interest for the period you had the credit. But any additional fees you paid might be refunded by the lender.

Please note that the cool-off period does not mean you can walk out of the loan. It means within the first month you can decide to repay the loan fully without incurring any other cost outside of interest.

Early repayment penalties on a personal loan

You might be charged early repayment penalties on your personal loan if you:

  1. want to pay more off your loan each month than your set monthly payment
  2. want to pay off the entire loan before the end of the term

Early repayment penalties normally amount to one or two months’ interest. However, some loan providers don’t charge early repayment penalties at all. If you think you might be able to pay off your loan early, you should borrow from one of these providers.

Some personal loans have fixed rates

Some loans have fixed interest rates. However, some personal loans have variable interest rates, meaning they can go up or down.

If you want to know for sure how much you will need to repay each month you should opt for a loan with a fixed interest rate.

The interest rates on a personal loan may vary depending on how much you want to borrow. This is called a ‘tiered interest rate’ system. Typically, you’ll be charged a higher interest rate for smaller loan amounts.

When you apply for a personal loan, you might not get the representative loan rate advertised by the lender. This is because loans in Kenya are tied to the central bank rates that vary from month to month thus the rate will be adjusted accordingly.

So you might be offered a loan with a higher interest rate than what was advertised. This could be the case also if the lender feels that you are a riskier borrower.

Being rejected for a loan can make it harder to be accepted for credit by another lender. So, when one lender says no, they often all do. Moreover, it is important you check how much you are eligible to borrow before applying to avoid rejection.

Personal loans and arrangement fees

Some personal loans might have arrangement fees but the majority do not. This is a fee paid to the lender who helps you secure the loan.  Arrangement fees are mostly observed in large borrowing with a high-risk perception. This usually makes loans expensive and it is best you avoid any lender who requires arrangement fees before lending to you.

Always shop around for the best deals

You should compare interest rates and terms from different lenders. This will give you a good reference point for who has the best deal in town. Don’t be afraid to call the lender representative and get the right information from them. 

Sometimes the rates advertised might change without the public knowledge and it’s best to confirm first before committing to a lender.

The interest rate on a personal loan may vary depending on:

  1. how much you want to borrow
  2. your credit rating
  3. the term
  4. the loan provider

The longer you have to pay back your personal loan, the lower your monthly payments will be. But a longer term means you’ll end up paying more interest overall.

But, repaying your loan over a shorter time period means larger monthly payments. So, it’s important to work out what you can afford to pay each month.

It’s important to check that you can afford to repay any loan you take out. If you fail to make repayments it can get you listed in the CRB which will lead to you being blacklisted from borrowing again from any other institution.

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