Do you need a loan? You are not alone. Many Kenyans and people across the world seek financial assistance from various institutions for different reasons. Some people borrow from Saccos, others from banks, mobile money apps, or even friends. Even governments borrow. Speaking of governments, even superpower countries like the US are not left out; they all have debt.

But what factors determine the best loan option for your needs? Or do you simply borrow from any available source as long as you think you can afford it?

Bizna Kenya spoke with personal finance expert Margaret Njeri, who shed light on the differences between Sacco, bank, and mobile money loans.

Njeri started by noting that many people, especially those in business, rely on loans, yet only a few understand the differences between various money lenders.

“Our key considerations should be interest rates, repayment terms, loan accessibility, collateral requirements, and overall suitability for different financial needs. Choosing the right lender can significantly impact your financial well-being—positively or negatively,” Njeri stated.

Sacco loans: Community-based lending

Saccos operate on a cooperative model, meaning members save and borrow within a community-based structure.

“The first thing to understand about Sacco loans is that they require membership. To access a loan, you must be a registered Sacco member and save consistently,” Njeri stated.

Key features of Sacco loans

1. Membership requirement: Only members can access loans.
2. Loan amount based on Savings: Members can borrow based on their savings, usually after saving for at least six months. Most Sacco offer loans upto three times the amount of deposits. Others offer upto 90% of deposits in cases where the borrower doesnt have security or guarantors.
3. Low interest rates: Sacco loans typically have monthly interest rates of 1-1.5%, translating to about 12% per annum, which is lower than bank loans.
4. Flexible repayment terms: Repayment periods range from months to several years, often with minimal penalties for early repayment.
5. Collateral and guarantors: Loan applicants need guarantors who are fellow Sacco members to guarantee their loans. Most Sacco require that the guarantors be active members. Their cumulative deposits should also be equal to or more than the loan amount being sought by the applicant.
6. Longer processing period: Loans may take days or weeks to be approved, as members are vetted and credit history is checked.
7. Saccos are regulated by the Sacco Societies Regulatory Authority (SASRA).

Who should consider Sacco loans?

“Small business owners or individuals looking for affordable credit. People who are willing to save before borrowing. Individuals in need of long-term loans with flexible repayment plans,” Njeri explained.

Bank loans: Traditional and structured lending

Unlike Saccos, Njeri observed that banks do not require membership but instead assess applicants based on their creditworthiness, collateral, and financial history.

“Banks serve the general public and offer larger loan amounts, including mortgages and business loans. However, they charge higher interest rates than Saccos,” Njeri offered.

Key features of bank loans

1. High loan limits: Banks provide significant loan amounts for personal, business, and mortgage financing.
2. Higher interest rates: Interest rates range from 18-21%, (sometimes even higher depending on banks risk assessment) per annum, making them more expensive than Sacco loans.
3. Strict qualification criteria: Banks evaluate credit history, business records, or salary slips (usually six months’ worth) before approving loans.
4. Long repayment periods: Depending on the loan type, repayment can extend up to 25 years, particularly for mortgages.
5. Collateral requirement: Banks often require security such as land (title deeds), vehicles (logbooks), or business assets. They also offer unsecured loans, which are approved after examination of payslips (for employees) or business statements. Some employers get into MOUs with banks to facilitate cheaper loans for their staff.
6. Faster loan processing: Personal loans can be disbursed within 24-48 hours, though business loans may take longer.
7. Additional charges: Processing fees, legal requirements, and insurance fees add to the overall cost of borrowing. Banks have hidden loan charges.
8. Banks are regulated by the Central Bank of Kenya.

Who should consider bank loans?

On who is best suited to take a bank loan, Njeri said:

“Those who can take bank loans include businesses seeking large capital investments, such as trade finance. Salaried individuals in need of structured personal loans, including unsecured loans and homebuyers looking for mortgage financing.”

Mobile money loans: Fast and convenient credit

Mobile loans are digital-based and offered by telecom companies and fintech firms.

Unlike banks and Saccos, mobile loans do not require collateral.

“They rely on your mobile transaction history and usage patterns for approval,” Njeri said.

Key features of mobile loans

1. No collateral required: Approval is based on mobile usage and transaction history.
2. Instant disbursement: Funds are available within minutes.
3. High interest rates: Monthly interest rates range from 7-15%, making them the most expensive option.
4. Short repayment periods: Borrowers must repay within 7-30 days.
5. Penalties for late payments: Late repayments attract penalties, negative credit scores, or blacklisting by CRB (Credit Reference Bureau), which may prevent access to other loans.
6. Mobile app lenders are regulated by the Central Bank of Kenya.

Who should consider mobile loans?

According to Njeri, individuals needing urgent, short-term funds are best suited to apply for mobile loans.

“Borrowers without collateral and entrepreneurs covering temporary cash flow gaps can also have this as an option,” she expressed.

However, Njeri cautioned against over-reliance on mobile loans.

“Instead of depending on expensive mobile loans, I encourage people to build an emergency fund that can cover their expenses for three to six months,” she advises.

Choosing between a Sacco, bank, or mobile loan, Njeri concludes by saying, depends on individual financial needs, urgency, and ability to meet the lender’s requirements.

Understanding these differences, she maintained, can help borrowers make informed financial decisions.