Have you ever been called by your bank or Sacco, who informed you that you qualify for a loan, and they persuaded you into taking it? If yes, or even if not, then this article is for you.
It is not uncommon for banks and other financial institutions to reach out with enticing loan offers to customers, especially those with a good credit history and busy accounts.
We all know money is sweet. It is even sweeter if it comes easily. Such a conversation with the soft-spoken bank credit officials is always tempting and usually leaves many signing up for loans they had not planned for.
The convincing part is usually the tagline the bank uses: “According to your account, we see you qualify for KSh x.” The conversation leaves many with wild imaginations of projects they can pump the money into.
But wait a minute—does the term “qualifying for a loan,” as used by most financial institutions, including mobile lenders, also mean that you can afford the loan?
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What is the difference between qualifying and affordability?
Bizna Kenya spoke to personal finance and leadership coach Susan Mtana, who shared broadly about the dos and don’ts before taking a loan that you qualify for.
“We want to look at responsible borrowing, meaning borrowing what can be paid back when due,” Mtana starts off.
Adding:
“Before I borrow, I need to ask myself, do I really need the loan? Yes, the bank is selling the loan to me, but qualifying for it does not automatically mean I need it or that I can afford it.”
Mtana emphasises that the next critical question is whether one has the capacity to repay the loan.
“I could have other obligations that need to be met on time, so I need to check my capacity. Sometimes, I may have several small, short-term loans and want to do something like a project. In such cases, loan restructuring might be a strategy—taking one loan to pay off the others and having something left for the project. But I need to check if I have the ability to repay the loan when due,” she notes.
A responsible borrower, Mtana says, is someone who ensures they can meet their repayment obligations on time without straining their finances.
“Assuming I’ve established that I need the money and have the capacity to pay, the next consideration is how I’ll use the loan,” she adds.
For instance, if someone takes a loan of KSh 500,000, they will need to pay it back with interest.
“A good debt is one where the money is utilized for something that appreciates in value. For example, if the total repayment is KSh 575,000, the investment I make should give me a return higher than that amount. If the return on investment is less than the cost of finance, then taking the loan might not be the most viable option,” Mtana advises.
In such situations, she suggests considering saving for a specific duration and using personal savings instead of taking a loan with a high cost of funds.
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Assessing your income source
Another important factor is assessing the income source.
“Many of us rely on employment income, and job security is not guaranteed. Take for instance the plight of USAID workers who have been laid off. Suppose my salary stops, my contract ends, or unforeseen circumstances like economic sanctions affect my income. How will I meet my obligations? The bank will still expect repayment, regardless of my situation,” she warns.
Mtana says that before taking a loan, people should ask themselves:
“Do I have assets I could dispose of or collateral beyond my salary to help me repay the loan? If the odds are not in my favour, I might reconsider taking the loan, even if the bank says I qualify.”
Exploring alternative ways of raising funds, such as saving over time or finding more affordable financing options, might be a better strategy than taking a bank loan.
Statutory requirements for bank loans
Statutory requirements also play a significant role in determining repayment capacity.
“The banks want to observe the ‘third rule,’” she says. “For example, if someone is earning a gross salary of KSh 100,000, a third of that is KSh 33,333. This means after all deductions, they must be left with at least KSh 33,000. That determines the repayment capacity of a person.”
However, Mtana points out that other commitments, such as standing orders for Sacco shares or existing obligations, could reduce this capacity.
Lenders are also not aware of how much you pay for school fees, rent, and family support. They don’t know if you have a baby mama whom you give child support via mobile money every month or workers you pay in cash.
Additionally, they may not be aware of other places where your money is demanded, capital-intensive areas that are not reflected in the payslip, and account activities that they use to declare that you can afford a given amount of a loan.
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Employment terms also matter
“Suppose someone is in employment—are they on permanent and pensionable terms, or is it a contract duration? If it’s a contract, for example, maybe for two years, and there are only 18 months remaining, the banks will also consider the remaining period of that contract and won’t extend you a loan repayment whose period goes above the employment period,” Mtana explains.
The personal finance expert concludes by saying that a loan is not just about qualifying for it because the lender has said so, but it is also about ensuring that you can afford it.
Responsible borrowing means asking the right questions, planning wisely, and securing your financial future.
