Those bank loans being hawked are not that cheap

By John Kariuki

Many people routinely take loans from financial institutions for various reasons. Indeed, the search for loans can be frantic and attractive when one is in the middle of a personal crisis.

But reading people’s financial woes correctly, most salespeople from the many financial institutions rush borrowers through the paperwork in the streets, workplaces and social places without the borrowers getting a chance to scrutinise the fine print.

And when the monthly deductions begin, many borrowers are shocked to see the installments are way above what they agreed to. Often, they are surprised to learn the loan application forms they filled had hidden clauses, including negotiation, loan appraisal and risk fees.

All these are pegged as a percentage of the amount borrowed. Going by the monthly installments loaded onto their pay slips, many borrowers realise that the loan interest routinely rises by between five and six points above the negotiated figure due to a plethora of hidden charges.

According to Martin Mwaniki, a personal banker, it is not easier to offset loans by borrowing cheaply from other financial institutions. Due care and consideration should be taken. He explains that when new institutions buy off existing loans, they withhold the money and request the borrowers’ loan balances from their old lenders so that they can offset it. Only then do they release the balance.

“The old lenders often give loan balances at face value of the debt owed and the second banks write cheques in those amounts,” says Mwaniki.

But some financial institutions don’t give loan clearance statements due to yet another cost.

“They demand that the clients pay contract severance charges before the loan accounts can be closed and clearance statements issued,” says Mwaniki.

He adds that if a client doesn’t have this penalty ready, which is calculated as a percentage of the borrowed money, he or she can be so near yet so far from the balance of the second loan.

“Of course, the second lender will not disburse the remaining fragment of the loan without a clearance statement from the earlier lender,” he says. Mwaniki advises people to read the fine print before jumping into any easy deal with financial institutions.

“Everybody will promise you the cheapest interest rates but take time to uncover all the hidden charges in all loan deals,” he advises. The rule of thumb is to multiply the repayment installments by the duration of the loan and see its total value, he says.

“The next step is to subtract the take-home amount from this total value and to get the interest that the loan will attract. Expressing this interest as a percentage of the total value gives you a measure of which financial institution is cheap or expensive,” he says.

Mwaniki advises borrowers to plan ahead when creditors come buying off their existing loans lest they fall into the trap of going through personal hell with a zero salary for months before the multiple stop orders are made and the new deductions normalised.

“In the meantime, fines accrue, pushing your new loan to a higher value than you signed,” he warns.

According to James Kung’u, a certified public accountant, the ease with which employed people are driving themselves into misery is not perpetrated exclusively by big players but, ironically, by some microfinance institutions.

“After roping in unbanked people, many of them are in a race to net salaried people,” he says.

Often, these outfits are managed by neighbourhood people, making many borrowers less cautious of the hidden charges. “In any case, the mantra nowadays is to buy from local institutions so that they can grow!”

Kung’u says many unsuspecting borrowers often fall prey to microfinance institutions’ fabulous claims of charging two or three per cent interest per month on the borrowed money.

“Unfortunately, this translates as 24 per cent and 36 per cent, respectively, which are way above all other lenders’ rates,” he says.

Add the negotiation, appraisal and insurance fees and the interest rates can easily hit 40 per cent per annum.

Kung’u advises borrowers to look beyond the lure of some microfinance institutions’ apparent motto that promises one can never leave without money following a visit to their offices.

Whereas two per cent or three interest may look small for a loan borrowed over three months, it would be utter misery for credit borrowed over 72 months, he adds.

This makes it imperative to invest in a little window shopping and some financial advice on which institution is offering the cheapest loan before taking credit. Any banker or accountant can be of immense help here.