Six questions to consider before agreeing to a loan
A quick approval is only one part of the decision. Understand the cost and the repayment plan before you commit.
Loans can cover a timing gap or the cost of something you intend to buy, but being approved for a loan does not mean the loan is suitable for you. The crucial point is what happens once the money is received. Take time before agreeing to a personal or short-term loan to reflect upon what you are agreeing to and consider how the loan will fit into your household budget.
1. What is the problem that I want to address?
Describe exactly what you want to buy and how much you actually require. A one-off item is different to a budget you consistently fall short of every month. If you are accessing a loan to cover a regular shortfall, then another loan may actually worsen the shortfall rather than help clear it.
Can this item be delayed? Does an existing provider offer a payment arrangement? Is there another option that does not use credit but may suit your needs? Informal borrowing can also have an impact on relationships and it is important to have clear expectations in these areas. Do not borrow the maximum amount simply because it is available.
2. How much will I have to pay back in total?
Make sure you are given, in writing, the amount you will receive, all interest and charges, how and when the loan will be repaid and the total amount you will have to pay back. Check if any charges are taken off before the loan is received. In this case the amount of money that you will actually receive may be less than the advertised loan amount.
Compare offers using the same term and amount. A small fee may be quite large if applied over a short term. Check for charges for late payment, extensions and early repayment. Do not base your decision on a low monthly repayment or a headline rate of interest.
3. How will I be able to pay the loan back?
Include the loan payment in your household budget along with rent, food, transport and any other commitments. Use income that you can reasonably rely upon. Do not use an uncertain payment from a customer, hoped-for overtime or a future loan as income.
Test the plan. What if one of your sources of income is delayed, or an essential bill is larger than expected? If you would need to access further loans to make the payment, then the plan may not be sustainable. The lender's assessment and your own review serve different purposes, and both deserve attention.
4. Who is the lender and how can I get in touch with them?
Check the lender's legal business name, contact details and complaints procedure. Check any claim of authorisation against the current information held by the relevant regulator. For digital lending providers in Kenya that are within the licensing scope of CBK, start with the directory page on the website of the Central Bank of Kenya.
Different types of lenders may fall within different regulatory schemes. A directory search is a verification step, but it does not confirm whether a product is suitable or affordable. Exercise caution if a company will not clearly explain who it is, its charges or its terms and conditions.
5. What else do I have to agree to in addition to the loan?
Carefully read the information on any guarantor, security, data usage, automatic payment and charges. App permissions are also important in addition to the financial information. Understand what data is collected and why, and do not share any passwords or verification codes with a person claiming to arrange a loan.
Consider the consequences for all those involved if a guarantor or important asset is involved. Seek appropriate independent advice if the arrangement is unclear or the consequences are significant. Make sure you have saved a copy of the terms you have agreed to.
6. What will happen if something goes wrong?
Find out how to report an incorrect charge, how to dispute a payment and how to discuss problems before the payment date. Make sure you save all statements and repayment receipts. Get in touch with the lender early if your circumstances change and get any new agreement in writing.
We have a starting guide to debt management that can help you to manage your current debt. Taking a few minutes to consider and ask questions about a loan can help to avoid a quick decision causing ongoing problems.
Source for the Kenyan digital-credit verification route: CBK: Directory of Digital Credit Providers. Check the latest directory before relying on a provider's status.
