Factors to consider before taking a loan in Kenya

The surge in borrowing activities across Kenya highlights a growing inclination towards loans among its populace. With an array of loan service providers and the convenience of accessing loans within seconds through mobile lending apps, the ease of borrowing has never been more accessible. However, before diving into debt, it’s essential to ponder over several crucial factors to ensure sound financial decision-making.
Factors to Consider before Taking a Loan in Kenya
- Purpose of the Loan
Before taking out a loan, it’s imperative to have a clearly defined purpose. Loans come with costs in the form of fees and interest, making it crucial to utilize borrowed funds for investments that yield future income. Investing in ventures like real estate can provide substantial returns, outweighing the associated costs and risks. Conversely, borrowing for consumption purposes, such as daily expenses or entertainment, is discouraged due to the absence of tangible value derived from such loans.
- Cost of the Loan
Every loan bears a cost, encompassing interest rates, insurance premiums, and renewal fees. To ensure affordability, borrowers should strive to minimize these costs, thereby reducing the overall financial burden of repaying the loan. Conducting thorough market research to identify lenders offering favorable rates is crucial. Additionally, considering formal financial institutions like banks and SACCOs, which adhere to regulated lending costs, can result in lower borrowing expenses compared to unregulated entities like shylocks.
- Loan Amount
The loan amount should be intricately tied to its purpose and precisely determined to facilitate effective planning. Borrowers should avoid taking out more than necessary to prevent unnecessary costs and wastage. Having savings to supplement the loan amount is ideal, as it reduces the overall borrowing size and associated risks. Different lending institutions cater to varying loan sizes, with SACCOs and microfinance institutions suitable for smaller amounts and banks better equipped for larger loans.
- Loan Security
Considering the type of collateral required by financial institutions is paramount before committing to a loan. While some lenders accept tangible assets like land or cars as security, others may employ a member guarantor approach, as seen in SACCOs. Evaluating one’s ability to provide suitable security or seeking institutions offering unsecured loans is crucial. Careful consideration is necessary to avoid potential loss of assets through auction in the event of loan default.
- Loan Insurance
Securing loan insurance is vital to mitigate unforeseen risks beyond one’s control. Insurance coverage protects against potential loss or damage to collateral assets, reducing the financial impact on borrowers. For instance, insuring assets like cars safeguards against accidents or theft, ensuring minimal financial repercussions in case of untoward incidents. Moreover, insurance coverage provides peace of mind to borrowers and safeguards the financial interests of their dependents in unfortunate circumstances.