By Peter Kamuri - East African Standard
With the rising cost of living, many people are growing desperate for money to help meet their expenses.
As a result, many of them are turning to extreme means of funding their budget deficits.
They care less about the costs that come with such kind of finances.
One such plan is approaching a commercial bank for a personal loan.
Indeed, these commercial banks are aware people are desperate for money.
They have thus come up with innovative ways of luring customers to borrow from them.
Although getting a personal loan from a bank is one way to get through tough financial times, it is not necessarily the best solution to all your financial miseries.
However, if you do not have another way out of your financial limbo other than securing a personal loan from a bank and other financial institutions, you must be aware that hasty decisions can make you lose your money at the end.
This can bring about more anguish than the problems you already have.
Kennedy Bosibori, a financial expert working with a micro-finance institution in Nairobi says that before you consider going for a personal loan, one should start by asking himself or herself whether there is enough income to honour the obligation.
"Some people borrow money even when their disposable income cannot allow. Although you may be desperate for money to get you through tough financial times, lack of a regular income to service the loan can only get you into a deeper hole," says Bosibori.
He advises, "Then ask yourself: is going for a personal loan the only option available for me to get out of my financial woes?
You might be surprised to discover that some options like cutting down on your expenses can help you significantly spare some money, eliminating the need of going for a loan."
Bosibori says that before you make a rash decision to fill out a loan application form, take time to find out whether there are alternatives of getting the money rather than going to the bank.
Bank charges in terms of interest are high and if they can be avoided, the better.
"Think about getting money from friends or family members. Although in some cases you may be expected to pay some interest on such money, the rates are quite low," he advises.
"In addition, establish whether you can do something to improve your daily, weekly or monthly income. There is a possibility that what you need is not a loan but a boost on your income.
Look for creative ways in which you can supplement your income.
Try part-time jobs for extra pay and you may be surprised that this is just what you required not a personal loan," says Bosibori.
Financial experts say experiencing financial problems does not necessarily mean you have to go for a personal loan.
You might be shocked to learn that you are just a poor manager of your finances and what you need is a financial advisor to show you how you can successfully manage your finances.
That is why it is advisable to talk to a financial expert before you fill in the loan application form.
However, if you are convinced that you indeed require a personal loan, it is important that you choose your lender well.
Choosing the right bank that can fulfill all your financial needs is the most important decision while applying for a loan.
Avoid going to loan sharks or lenders who will take advantage of your situation.
"If you decide to get money from a bank, do not just go for one that will not just give you banking and lending services only, but one that will offer support, advice and guidance among other services. The bank should then tell you how soon you should get the loan and whether there are hidden charges," counsels Bosibori.
"Where possible, consult friends or relatives who can recommend a suitable bank for you. However, you should consider using your current bank for your lender as you may get some concessions, but do not forget to compare rates with other banks," he concludes.
Meanwhile, experts say most Kenyan banks cap the loan repayment periods up to 48 months.
To keep monthly instalments and interests reasonable, banks have to ensure the repayments don’t exceed 50 per cent of a borrower’s gross salary or regular income.
So, if your objective is to convince a bank to grant you a loan, you’ll have a tough time unless you meet the requirements of both the lenders and the Central Bank.
"Banks have their own rules about salary size and age of borrowers for example, and if your profile does not fit, they will not lend to you. It’s not about presenting your case for a loan, but rather about meeting the requirements of the bank," says an expert.
But the more information and clarity that you can provide to your bank, Musty says, the smoother the process will be to apply for and receive the result of a loan request.
"It is important to have regular conversations with your relationship manager to ensure that you are on top of your finances and that they are being managed in the best possible way."
If you really need to take out a loan, it is critical to shop around to get the best deal possible.
Taking the first loan offered can result in paying a higher interest rate than needed, and make the purchase more expensive.
Go for fixed interest. The first thing to do is check if the interest payable is fixed or flexible.
Gurnos Stonuary of Nexus Group warns that if the loan has flexible interest, monthly payments may rise when the interest rate rises.
Keep it short. Always aim to have a loan for the shortest possible period, because the longer you take a loan, the more interest you pay.
Don’t get tempted when lenders offer to extend your loan amount over a longer period.
"This can look inviting as it will reduce your monthly repayments, but beware the longer the loan, the more interest you will have to pay overall," says Stonuary