Negotiate your way to cheaper loans

By Anthony Ngatia

In an era when many banks are willing to lend, opportunities for customers to negotiate lower interest rates have never been better.

Today, knowledgeable customers are confidently negotiating for fairer and much lower terms for loans in a move seen by analysts to be the way of the future, as the credit reference bureaus start operations next month.

What could make one successfully negotiate with a bank for a lower interest rate?

"If your relationship with a bank is good, then you can always negotiate for a lower interest rate," says Julius Marige, a financial consultant.

"But the adjustment could be minimal and not as significant as one would prefer," he advises.

This is because the base lending rate is normally pegged on Treasury bill rates or Central Bank rate and for a bank to lower the interest rate to an individual, it will just be marginal, perhaps a reduction of the premium the bank has kept above the benchmark rates.

Currently, the CBK benchmark-lending rate is 6.75 per cent but the average rate for commercial banks has remained at 15 per cent. It is notable, however, that some banks have reduced their rate to 10 per cent.

"In our case, the interest rates range from 15.5 to 19.5 per cent. If you intend to negotiate for a lower rate, we consider such factors as the loan amount, and the length of time you will pay also matters. A big loan will qualify for a slight reduction in rates, but not below the minimum rate," said a Standard Chartered banker who sought anonymity.

Good relationship

In these times, most banks are cultivating close relationship with their customers. A good relationship with a bank is one of the factors that will be considered before accenting to lowering a loan’s interest rate.

"For Barclays Bank, we look at a customer’s relationship with the bank first, your loyalty, risk, loan volume, and the product type before considering to lower the interest rate," said Fred Maingi, a marketing executive.

It is unfortunate that lowering of rates is normally minimal and is reserved for high worth business people.

A successful negotiation normally also applies to big businesses and corporate customers. To these, and in particular those who are most creditworthy, banks charge a rate that is known as prime lending rate.

"For individual consumers, it is normal for banks to charge prime plus premium depending on such factors like their assets, liabilities, income and creditworthiness," said Kizito Toboso, a banker in Nairobi.

A staffer at Equity Bank, who can’t be quoted because he is not allowed to comment on the bank’s matters said: "We indeed have a room for negotiation with customers borrowing more than Sh10 million. Other loans like scheme loans, however have fixed rates."

The bank’s rates range from 15 to 18 per cent with the exception to the farmers’ loan, which is pegged at 10 per cent.

To many customers, the way banks determine their interest rates has been deliberate with the intention of exploiting customers but some bankers’ dispute. Wilson Kenyatta, an economist, said the principles of loan pricing remain almost the same in most banks, but there are three concepts lenders use to determine lending rates.

Intense competition

"The first is the price-leadership model. This concept entails a bank using a form of price leadership in credit cost establishment due to intense competition for loans and deposits from other lenders and the attendant narrowing of the profit margin. Major banks establish base or prime rate, which is often the interest rate charged to the most creditworthy customers. With this model, a benchmark for many other types of loans is established," he said.

The cost–plus loan-pricing model is the second one. This assumes the rate of interest charged on any loan includes the following components; the cost of funding incurred by the bank to raise funds from various money markets for lending, the cost of servicing the loan including the application, payment processing, bank’s wages or salaries, a risk premium to compensate the bank for the default risk in the loan payment, and the profit margin on each loan that guarantees an adequate return on the bank’s capital.

Other factors

The third one, which is now being introduced in the country is the credit scoring system. According to this system, points are added and subtracted based on select data in one’s credit report. Credit scoring is useful in setting up an appropriate default premium when determining the rate of interest charged to a potential borrower. Risk based pricing is obtained by setting a default premium and optimal rates and cut off points. The borrower with better credit history ends up getting a loan at a reduced price.

"Customers armed with their credit histories will also be empowered to negotiate better terms for credit with banks," Prof Njuguna Ndungu, the CBK governor was quoted saying.

John Kihanda, a Certified Public Accountant said: "If you want to benefit from a low cost credit, convince the bank you are a good risk, present yourself in a professional manner to your banker."

Despite one’s desire to borrow a loan at a cheaper cost and availability for that opportunity, some fundamentals could frustrate many, especially in the days to come as the credit referencing will be a key feature of our credit system.

According to Cyrus Kirika, a banker in Nairobi: "You need to have an exemplary credit history. In case you have ever defaulted before, there is no chance for a low interest loan."

Some other factors that banks consider before agreeing to lower interest rate include one’s job and their size of income."

It is usual for a bank to ascertain that you are making sufficient income to cater for your living expenses and still afford loan payments," said Samuel Gikuma, an accountant in Nairobi.