You may find yourself in a tough financial situation at one point or another. Whether it’s because of an emergency or if you need more capital for your business, every person goes through periods of stress. In these times, it can be hard to know where to turn for help.
Luckily, there are many personal loans out there that can make life a little easier. This article will go over how to get the best rates for personal loans and what you should look for when researching your options. Plus, we give you some examples of the best personal loans available on the market today.
What Is A Personal Loan?
A personal loan is an amount of money you can borrow from a financial institution, Sacco’s, or a digital lender to use for a variety of purposes. The money you borrow is repaid in equal monthly installments (EMI)over time, typically with interest. Personal loans are either secured or unsecured loan.
For example, you might use a personal loan to cover:
- Improve business cash flow.
- Buy land
- Pay your medical bills.
- Cater for wedding expenses
- Renovate your home or carry out repairs.
- Pay for unforeseen expenses.
Common Types Of Personal Loans
If you are looking to take out a personal loan, you may be wondering what types of loans are available. Here, is a quick overview of some of the most common types of personal loans so you can choose the very best loan option for your needs.
Secured Personal loans
To get a secured loan you will need collateral to back it up. For example you can use your vehicle while getting a loan. Secured loans are ideal for those with a poor credit scores or if you need a huge amount of loan.
Unsecured loan
Unlike a secured loan an unsecured loan does not require any collateral. Its most ideal for those with higher credit scores and a source of income.
Debt consolidation loans
Debt consolidation involves getting one loan that clears all your outstanding debts. You need to secure a loan with a lower interest rates to consolidate debt, and clear off all other debts.
Co-BORROWER and Joint loans
Sacco’s and microfinance institutions require you to get a guarantor to co sign the loan before they can approve. Joint loans are offered to spouses or business partners.
Secured Check off Loans
Secured check off loans are issued against your annual income and a collateral. These loans are most offered to government employees in Kenya.
Unsecured check off loans
Unsecured check off loans are offered to employees whose employer has a memorandum with a financial institutions.
How Personal Loans Work
To get a personal loan, you need to identify the best financial institution for personal loans. After you identify the lender of choice, you need to fill in the application form and submit it. The lender will approve or reject your application based on your income, credit history, and ability to pay.
When applying for a personal loan, you will need the following:
- Identification card
- Bank statements for the last six months
- Pay slips or any other proof of income
- Credit history
- Proof that you own the collateral you intend to use for the loan if opt for a secured one.
- A duly completed application form.
A personal loan is made up of several parts, as follows:
Interest rates
The bank or financial institution charges you an annual percentage rate(APR). In Kenya, each lender can have a different APR. The Central Bank of Kenya (CBK)issues the base lending rate, from which banks calculate their interest rates.
The interest rate the banks and other financial institutions will offer will depend on the set APR, income, credit history, and ability to repay the loan. Most interest rates on loans are either fixed or variable.
Fixed interest rates remain the same over the loan period, while variable interest rates depend on market forces.
Monthly repayment
Based on your income, your loan will have an equal monthly repayment amount(EMI). This is calculated by adding up the principal and interest and dividing it by the loan tenure. Your monthly payment should be affordable.
Repayment duration
This is the period by which you should complete the loan payment. The duration for most personal loans ranges from repayment period of one to seven years.
Origination fees
Most lenders charge an origination fee. This is a certain percentage of the amount they will disburse.
The Advantages Of Taking A Personal Loan
- One lump sum—you get the money all at once.
- Most banks will approve personal loans in 48 hours.
- No collateral for unsecured loans.
- It is easier to manage as you can decide how to allocate the money.
Disadvantages Of Taking A Personal Loan
- Interest rates can be higher as compared to other forms of debt.
- More eligibility requirements.
- Their fees and penalties can be high.
How People Are Using Personal Loans
Before you opt for a personal loan, you need to consider whether there may be less expensive ways you could borrow. Some acceptable reasons for choosing a personal loan are:
- When you need to pay off high-interest debt.
- To improve or upgrade your home.
- Paying for a major life event such as a wedding.
- Improving your credit score.
How To Improve Your Chances Of Getting Approved For A Personal Loan
Before you opt for a specific personal loan, you must conduct detailed research. Here are the main things that you need to consider.
Loan amount
Before you fill in the loan application, make sure you check your budget and see how much you need. Determine the amount you will need to fully ensure you sort out your needs without having to look for more debt.
Loan repayment tenure
Consider taking a loan for the shortest time possible. The longer the loan tenure, the more interest you will pay, making the cost of the loan high. Review your finances and make sure the repayment tenure you choose is suitable.
In the event of a windfall, consider paying for the loan in full.
Lender
Avoid getting personal loans from unlicensed lenders. They will charge exorbitant interest and use uncouth methods to collect their money. Always make sure you get your loans from the bank and any other licensed lenders.
Interest rates
There will be a lot of lenders who will approach you with the promise of low-interest rates. It’s important to make sure you understand how APR works and the impact it has on your loan. Understand how they calculate the interest rate they are offering.
Application fees
Some lenders charge an application fee when you apply for a loan. Do your research and choose the lender who charges the lowest application fees.
Origination fees
This is a fee charged by lenders after your personal loan application is approved and loan funds are deposited into your bank account.
Late payment fees
Lenders usually charge late payment fees if you fail to make the payment on time.
Loan insurance
Lenders charge an insurance fee to cover the risk of non-payment in case you lose your source of income.
Penalty for early payment
This is a penalty applied when you pay your loan ahead of schedule and may increase the cost of your loan.
Loan Tenure
This is the loan duration. You are expected to pay off your loan at the end of the loan duration.
What Fees Should I Look Out For When Choosing A Personal Loan?
When taking a personal loan here are the fees you should watch out for:
Origination fee
Most lenders charge an origination fee to cover the cost of processing your loan. This fee is typically a percentage of your loan amount and can range from 1% to 8%. This amount may be deducted from your loan amount or added to loan.
Prepayment fee
Some lenders will charge you a fee if you pay off your loan early. This fee is typically a percentage of your loan amount and can range from 1% to 5%.
Late payment fee
If you make a late payment, most lenders will charge a late fee. This fee is a percentage of our outstanding loan balance.
Annual fee
Some lenders charge you a percentage annual fee to cover the cost of servicing your loan.
When choosing a personal loan you need to compare the fees from various lender and choose one with the lowest.
Steps To Follow When Getting A Personal Loan
If you decide that a personal loan is the right type of financing for you, follow these eight steps.
- Create a budget and check how much you need.
- Check your credit score to ensure you are in good standing.
- Consider your loan options. Check whether there are better options available in the market.
- Choose your preferred loan type.
- Shop around for the best personal loan rates.
- Pick your preferred lender and apply.
- Provide the necessary documentation and verify it.
- Accept the loan terms you choose and start making payments
What is a good interest rate on a personal loan?
The base lending rate set by the central bank of Kenya is 8.75 as at January 2023. This determines the interest rates banks, microfinance and other institution charge. You can therefore expect an interest rate of above the 8.75% base rate.
Interest rates on personal loans can vary greatly depending on a number of factors, such as your credit score, the length of the loan, and the lender you choose. If you have good credit, you may be able to get a personal loan with an interest rate as low as 5%. However, if you have bad credit, you could end up paying an interest rate of 20% or more.
The best way to get a good interest rate on a personal loan is to shop around and compare competitive interest rates, from multiple lenders. Most banks are charging an interest rate from 12-18% p.a . Since the interest rates make up the highest cost of the loan its best to look out for the lowest.
How to Get the Best Rates for Personal Loans
Rates for personal loans vary from one lender to the next. The lower the rate, the better, as that will reduce the cost of the loan. We look at tips on how to get the best rates for personal loans.
Maintain a good credit score.
The higher your credit score, the more likely you are going to get the best rate for personal loans. Plus, you are likely to get a higher loan amount with a longer duration. A good credit score shows you pay your loans as per the schedule and on time.
Avoid applying for multiple loans.
Applying for multiple loans shows you are hungry for credit. This especially affects your credit score when the loan is rejected.
Shop around for the best rates on personal loans.
Research and review the best rates for personal loans. Use our personal loan lenders’ calculator to compare the various offers in the market. Choose a lender with the best rates for personal loans. Although a lower rate for a personal loan is good, consider other features of the loan.
Use our personal loan calculator to compare different loans .
The 7 Best Personal Loans in Kenya
Here are some of the best personal loans in Kenya.
| Lender | Maximum amount | Rates for personal loans | Fees | Loan Duration | Eligibility |
| Absa Personal loan(unsecured non-check off) | Ksh 6,000,000 | 14.5% to 15% | Processing fees 3.3% Insurance fees-0.66% | 8 years | |
| Standard Chartered Personal loan(unsecured non-check off) | Ksh 7,000,000 | 12.5% to 13% | Arrangement fees-2.50% Insurance /job loss cover -0.53% | 7 years | Income of Ksh 15,000 to 40,000 |
| KCB Personal loan (Unsecured non-check off) | Ksh 2,000,000 | 13% (CBR Rate of 9% plus a variable margin of 4%) | Negotiation fees- 2.5% Exercise duty -20% of negotiation fees | 3 years | The account holder for a minimum of 6 months |
| Co-operative Bank | Ksh 4,000,000 | 13% | Processing fees of 3% Insurance fees -0.004% Exercise duty -20% of processing fees | 8 years | Bank account with Co-op |
| NCBA Personal Loan | Ksh 4,000,000 | 13% | Processing fees of 2% Insurance fees-0.7% | 6 years | |
| Equity Bank Personal loan | Ksh 3,000,000 | 11% to 13% | Processing fees -5% Insurance fees -1% to 2% | 3 years | Active bank account for 6 months |
| National Bank Personal Loan | Ksh 6,000,000 | 13% | Processing fees of 2 % for new loans, and 1.5% for top-ups. | 7 years |
There are a few things to keep in mind when shopping for personal loans in Kenya. First, make sure you compare rates from multiple lenders to ensure you’re getting the best deal possible. Second, be aware of any fees or charges associated with the loan so there are no surprises down the road. Finally, remember to shop around and compare offers before making a final decision – this will help you get the best rates for personal loans in Kenya.
