We have up to 5 types of loans you can apply for in Kenya. You can use borrowed money for different purposes, which must fall in alignment with our needs. This is the best time for us to answer questions like, “What are the types of loans?, which is the best? And what purposes match the different types of loans?”.

Therefore, the need to start a business, solve a personal pressing need, and buy a home or a property, there are loans made for these varieties of needs. 

Furthermore, each type of loan solves a peculiar problem, and hence, none is the best when it is being matched with our different needs. This article will reveal the types of loans we have in Kenya and all you need to know.

What you need to know about the types of loans in Kenya 

For whatever you may be needing funds for, try to find out the type of loan suitable for your needs. However, if it is your first loan, ask around and do your findings. You can not need a business loan and go for a personal loan, which often attracts a relatively high interest rate.

5 types of loans you can apply for in Kenya

The different loans we have in Kenya are:

1. Personal loans 
2. Secured loans
3. Unsecured loans
4. Fixed-rate loans
5. Variable-rate loans

1. Personal loans

Personal loans are one of the 5 types of loans you can apply for in Kenya. This is a type of loan used in solving personal pressing needs. Personal loans can clear household bills, buy foodstuffs, pay off church dues, etc. A personal loan permits you to borrow cash from a lender for almost any personal purpose, mostly with a fixed duration, a fixed interest rate, and a regular monthly repayment. No collateral is required and banks, online lenders, and street lenders offer this type of loan. It is for those who need a relatively small amount of money.

2. Unsecured loans: 

They offer this type of personal loan without collateral and approve it based on your credit score. The pros of this kind of loan are that there is no collateral involved. The disadvantage is a slight increase in interest rates. If a borrower defaults on a personal loan, it leaves the lender with few options but to involve agents or debt collectors. These people help in recovering bad debts. However, Lenders do not have the right to take your assets, land, etc as collateral. You promise to repay and show proof of solid income and excellent credit history. 

3. Secured loans

Secured loans are obtained with collateral. Because it has recovered some part of the loan risk if the interest goes down. The advantage is a partially low interest rate and losing collateral in the case of loan default. Where your credit scores aren’t excellent enough to qualify for your unsecured loan, they request collateral. Secured loans show a lower risk rate to the lender or bank.

4. Fixed-rate loans

Fixed-rate loans are one of the 5 types of loans you can apply for in Kenya. In this type of loan, the interest and the monthly repayment remain the same till you pay off the entire amount. A fixed-rate loan is a type of personal loan where the interest rate stays unchanged for the entire duration or for a part of the loan period. Most citizens of Kenya go for fixed-rate loans for long-term loans. To an extent, they have a clear view of the future costs and monthly repayments.

5. Variable-rate loans: 

The interest rate of this type of loan can go down or up depending on the marketing structure. A variable-rate loan is a type of loan or personal loan where the interest alone changes according to changes in market structure It is in most cases called an “adjustable” or a “floating” rate. 

Note: Unsecured loans, Secured loans, Fixed-rate loans, and Variable-rate loans are seen as types of personal loans in Kenya.

Examples of loans you can apply for in Kenya

1. Business loans
2. Home loans
3. SME and agricultural loans
4. Home equity logbook loans
5. Car loans
6. Student and education loans
7. Salary advance

1. Business loans:

Business loans are offered to entrepreneurs and startups. They also offer it to business people who will go into expansion. It comes with an average low-interest rate. It is mainly offered by banks because it often requires huge capital. 

A business loan is a loan specifically for business purposes. Such loans come as asset-based loans, invoice financing, micro-loans, and business cash advances.

2. Home loan: 

They offer home loans to customers who want to purchase a home. The borrower in most cases goes to find a home and then meets the financial institution for the loan. The financial institution takes the title of the home till the borrower makes the final payment. It comprises an adjustable or fixed interest rate and repayment duration. They mortgage the home in question to the lender, mostly banks as a security till the final loan repayment.

3. SME and Agricultural loans: 

SME loans are offered to small and medium enterprise individuals who are looking to start up a business to boost the economy. They offer it on the basis that you pay little or no interest depending on the platform. Agricultural loans are for farmers and Agribusinesses to further turn their crude way of farming to a mechanized way in order to boost the agricultural sector. They in return make a repayment by the due date.

4. Home equity logbook loans: 

This type of loan requires the borrower to submit all documents of his home to the bank to raise a loan. The loan might be 50% monetary value of the home. Landlords benefit a lot from this type of loan especially when they want to embark on a new project. Projects like education loans, re-roofing, property acquisition, etc. Moreover, the amount of the loan will be based on the value of the property.

5. Car loans: 

This is a loan given to borrowers for them to own their dream car. There are terms and conditions you need to fulfill before you can get this type of loan. Often 80% to 90% of the value of the car is financed by the bank or the lender with an interest rate attached. It requires the borrower to pay back the loan and possess full ownership of the car. 

6. Students and education loans: 

There was a certain time when education was expensive, but the acquisition of loans has come to subsidize it. Lenders offer student loans to students or parents to finance their education. In return, the students graduate, get a job, and start paying off their loans. 

In addition, they use student loans to clear tuition fees, books, and supplies, living expenses, etc.

7. Salary advance: 

A salary advance is a type or form of a loan to salary earners who need cash and in return payoff at the end of the month. Monthly earners who need loans and can not wait till month end, go to acquire salary advance.

They give it to employees who receive wages or salary every month. It is simply a loan to an employee, and they pay it back immediately after the salary enters the account. 

How to apply for any of the types of loans

Applying for loans in Kenya is generally the same procedure as all lenders. Except for slight differences. The procedures are:

1. Download the loan app on the Play Store or visit the lender’s website and fill out the application form. Or visit the lender or the bank’s physical office and fill out your application form 
2. Create an account on the loan app and submit all your personal details. 
3. Wait for the app to read your details. Here you are to also submit your documents if requested.
4. Wait for loan approval and have your loan.

General eligibility for different types of loans

To be eligible for a particular type of loan you need to be:

1. Be 18 years and above
2. Have a national ID 
3. Possess an active phone number 

Conclusion

In the past few years, digital loans have changed the market for credit in Kenya. We have up to 5 types of loans you can apply for in Kenya. What should be of great concern to you is to identify the type of loan you need. 

However, It is pertinent to do proper findings and comparisons and also know the type of loans your loan falls under. When you want to take out a loan for an emergency or business expansion, know the type of loan you would go for. Know the requirements and eligibility attached to each type of loan because in Kenya each type of loan has its own peculiar features.

Among the three basic necessities, only “Shelter” can be leveraged for cash. Home equity loans in Kenya provide lower-interest cash during a financial crisis. One of the benefits of home ownership is the opportunity to benefit from the housing market’s performance when it is performing well. 

In addition to getting a low interest rate, you also have an appreciating asset that you can leverage. You could complete a number of important projects without impeding your long-term financial goals if you have a solid plan in place to utilize your home equity.

What Is a Home Equity Loan?

A home equity loan is a loan taken out against the equity in your home. You get a home equity loan based on how much you owe on your mortgage and how much your house is worth. It is also known as a home equity installment loan and is a form  of consumer debt.

Additionally, a home equity loan can also be called a “second mortgage” which  allows you to keep your existing mortgage while taking out a new one time loan against your home’s equity. You repay the loan with equal monthly payments over a fixed period.

What you should know about home equity loans in Kenya

Take advantage of your home’s equity by taking a loan, but consider how long you plan to stay in your home before applying for a home equity loan. Your loan or credit line must be paid off before your sale date. Depending on how much you owe on your mortgage and how much you pay in closing costs, you could walk away with little or no profit from the sale.

How a Home Equity Loan Works

The concept of a second mortgage is essentially the same as that of a home equity loan. Lenders use the equity in the home as collateral. Borrowing capabilities for homeowners will partly depend on the combined loan-to-value ratio, which will range from 80% to 85% of the assessed value of the home. Of course.

Banks in Kenya that offer home equity loans

1. Absa bank
2. Equity bank
3. Standard chartered 

How to determine home equity loan amount and interest rate

The amount of the loan and the rate of interest charged also depend on:

1. The borrower’s credit score 
2. Previous payment history.
3. Value of the home

Two varieties of home equity loan

Home equity loans come in two varieties, which are:

1.  Fixed-rate loans: In this case, the borrower receives a lump-sum payment which is repaid over a fixed period, and the payments and loan interest percentage remain the same.
2. Home equity revolving lines of credit: A home equity line of credit (HELOC) is like a credit card that has a variable or adjustable rate of interest

Advantages and Disadvantages

Home equity loans have several benefits, including their affordability, but they also have drawbacks. The pros and cons include:

Pros

1. Easy to get and source for
2. Room for fixed interest rates
3. Flexible use of funds
4. Lower interest rates than other debt
5. Possible tax benefit of interest paid

Cons

1. Two mortgage payments running at the same time
2. Higher interest rate and payment of premium
3. Comes with Closing costs
4. Possible spiraling debt
5. Can lead to home foreclosure

Example of a Home Equity Loan

Example 1:

For example, if your home is currently worth ksh. 800,000 and your current mortgage balance is Ksh 500,000, you have Ksh 200,000 of equity in the home and could borrow up to ksh. 80,000 (80% of ksh. 200,000) with a home equity loan.

Example 2:

Let’s say you have a loan with a balance of ksh. 50,000 at an interest rate of 26% with one year left on the term. Paying off that debt to a home equity loan at a rate of 10% with a term of four years would actually cost you more money if you took all four years to pay off the home equity loan. 

Note: Remember that your home is now collateral for the loan.

The Right Way to Use a Home Equity Loan

1. When you have a stable and reliable source of income.
2. When you do not have additional loans elsewhere and borrow responsibly.
3. If you plan to use a fixed-rate home equity loan to cover a large purchase, such as the cost of a new roof on your house or an unexpected personal need.. 

Benefits of home equity loan to borrowers

1. Home equity loans provide an easily accessible source of available cash. 
2. Helps in consolidating pressing debts
3. The interest rate on a home equity loan is way low compared to the rates on credit cards and other consumer loans.

Benefits of home equity loan to Lenders

1. Gets interest income and fees from the borrower’s initial mortgage and earns even more from the home equity loan.
2.  For defaulting borrowers, a lender gets both the initial mortgage and the home equity loan; it also gets to retake back the property and sell it again, starting the cycle over with the next person. 

Conclusion 

Note that a home equity financing can be set up as a fixed loan or a line of credit. A home equity loan provides you with the total loan amount upfront.

Look around for loan plans you can get from banks, SACCO, credit unions, and mortgage companies when considering a home equity loan or credit line. Shopping or conducting a careful review of all financial institutions can help you get a better deal.

Keep in mind, however, that the amount you borrow through a home equity loan is secured by your home. The lender may have the authority to forcibly sell your house if you don’t pay your debt. Make sure you understand your home equity loan terms.

As the search for more creative and better ways to facilitate loan application continues to rise, both lenders and borrowers continue to practice secured loans. This means an increased willingness of lenders to give out loans by receiving collateral. 

Though in Kenya lending standards appear to be sophisticated, borrowers still protect their risk exposure by providing an asset. The asset turns to belong to the lender if the borrower cannot repay the loan amount. So it is important that borrowers should be open-minded and probing about what they may pledge as collateral. If the earning power is enhanced and improved on, the lender continues to look more favourable to the borrower.

Let us study secured loans in Kenya and everything you need to know.

What is a secured loan

A secured loan is a loan given to individuals who have deposited or provided any form of security. Examples of such securities are title deeds, logbook, share certificates, etc. They are acquired with specific collateral as requested by the lender considering the loan amount. A logbook loan is one of the highest types of loan applied for in Kenya by the citizens. 

Understanding secured loans

Secured loans can come as a business or personal loan in Kenya. The lender allows you to borrow by providing a collateral or security. Most times the collateral for secured loans are assets for money.

If you default on the loan, the lender sells off the asset or seizes the collateral. So with a mortgage loan for an instance, until you make the full payment, the home is not yours yet. Once you cannot pay, the bank takes possession of the asset.

How a secured loan works

In Kenya secured loans allow you to borrow and then submit collateral. Once you repay the loan, you take back your collateral. But if you cannot pay back the loan, the lender owns the property.

You can find these loans from many lenders like the bank, credit union, and online lenders. Most lenders offer these loans as mortgages and car loans. However, there are still other ways you can secure a loan using your equipment.

Finally, they require a little credit check depending on the lender. The lender determines your interest rates based on the amount you are applying for and the repayment duration. Interest rates for this type of loan are low when compared with unsecured loans. It is so because the risk of the loan is reduced by using an asset to secure the loan.

Rates and fees

The rates and fees associated with secured loans in Kenya are:

1. Interest rates
2. Negotiation fee
3. Annual renewal fee
4. Documentation and security fee
5. Valuation fee

Standard requirements

The basic requirements for any secured loan are the same everywhere in Kenya except some little difference. The requirements are:

1. Kenya national ID card
2. Passport 
3. Must have an account with the financial institution. Some lenders might also prefer you have an M-Pesa account
4. Employment card
5. The last 3 months’ pay slips
6. Evidence of income and consistent cash flow for self employed.
7. Valuation report for motor vehicle loans

Benefits

The benefits are many. To dive deep into the matter, it is one of the easier loans to apply for. You do not need to worry about your credit score and the lender, too, worries less. Alternatively, once you present the collateral, they reduce the risk of the loan. Once the borrower cannot pay back the loan, the lender sells it off to recuperate the fund. The benefits include:

1. The lender is relaxed and has an alternative way of recovering the money once the borrower cannot pay back the money.
2. It has a competitive and low-interest rate.
3. It has a longer repayment duration.
4. The borrower also enjoys in such a way that many lenders remove other associated fees once they request security.

Examples of secured loans

Secured loans can come in different forms and used for different purposes. So if you are borrowing funds for business or for personal usage, your security option can come in the form:

1. Bad credit loans
2. Mortgage loans
3. Car logbook loans
4. Vehicle loans
5. Shylocks loans
6. Equipment loans

Where to find secured loans

In Kenya, searching for where to get secured loans is just not far-fetched. You can collect secured loans from different financial institutions like:

1. Banks
2. Online lenders
3. Credit unions

What can you use as a collateral for secured loans

Kenya is a country that has a larger financial market. And they offer several types of loans with collateral while some are not. Collateral as an asset is pledged in exchange for a fund. The lender takes possession of the asset till the borrower pays off the loan. Collateral most lenders want are items that can easily be converted into cash. The items include:

1. Houses
2. Bonds
3. Cars
4. Stock
5. Jewelry
6. Antique furniture
7. machines

These assets represent a revenue stream for the lender once the borrower cannot repay the loan.

What to consider when looking at secured loans

Secured loans are risky in the sense that you lose everything once you cannot pay back the loan. It is also risky to the lender when the collateral cannot be easily liquidated. When comparing and considering secured loans, there are tips to keep in mind. They are:

1. The type of collateral or security required for the secured loan
2. The interest rate associated with the secured loan
3. Check if the secured loan interest rate is fixed or variable
4. Look out for other fees and hidden charges
5. Ask for the minimum and maximum loan amount
6. Consider also the credit score
7. Be sure to assimilate the whole requirements.

Conclusion 

With a secured business or personal loan, be rest assured that you repay with a low-interest rate. Be sure to check the requirements. While they continue to ask for collateral, be capable of paying back the loan, you do not want to be taken by surprise. And with a secured loan, checking your credit score is not taken too seriously by some lenders. Note that, it is helpful to ask and compare lenders before you take a step.

The system of investment is changing and the way we borrow money is coming to live on our palms. We can get money from other individuals other than banks and financial institutions.

However, when you do not want to borrow money from the bank, peer-to-peer lending Kenya is an option worth seeking.

Can you picture yourself in Kenya and see the emerging market filled with individuals who are ready to offer financial help. So the emergence of peer-to-peer lending opened a new opportunity for investors willing to offer more financial help. Individuals make a profit by coming together and joining a fund, then lending it out.

Let us discuss everything you need to know about peer-to-peer lending in Kenya.

What Is Peer-to-Peer Lending?

Peer-to-peer lending is a platform that enables individuals to get loans directly from lenders other than formal financial institutions. It is a social or crowd funding that connects lenders and borrowers. Most of the loans on this platform are unsecured personal loans. With its unique characteristics with other formal financial institutions, they consider it as an alternative to financing.

Understanding Peer-to-Peer Lending

Peer-to-peer lending binds borrowers and investors who will lend out some part of their money. First the investors open an account and fund it and then disperse it as loans. It is usually done in cash with little formal documentation. 

However, it is limited to a close network of people in the lender’s group. They also give loans to outsiders. A third party can handle the loan application and disbursement and shares a portion of the profit with the lender. Lenders or investors on this platform include people who are ready and willing to assure a portion of the loan.

How Peer-to-Peer lending evolved

Traditionally, lending in Kenya has been informal. Peer-to-peer lending started with no documentation and in cash and with a close number of people in the same group. Earlier on, the peer-to-peer lending system started by offering loans to people who were spurned by formal financial institutions in Kenya.

Often lending on this platform is a way to generate interest in cash at a rate that exceeds those offered by the banks. Lenders then are allowed to start with a little money and as time goes on, they can decide to contribute more and loan out more. 

How Does Peer-to-Peer Lending Work?

Peer-to-peer lending involves processes and steps which include:

1. You fill and submit an online application. This entails you fill in a credit inquiry which can either be soft or hard.

2. The lender may assign you a risk category. Here, your score or rating will affect the principal amount, terms and interest rate. If you settle for the loan limit, you can move forward with the application. 

3. Investors review your loan request and requirements. State why you need the loan and how you can pay back. Your reasons have full chances of convincing the lender. Depending on the structure of that peer-to-peer lender, they might reject your loan application.

4. Loan acceptance. If the investor states other criteria that you are suitable with, you can accept the terms and the loan amount. Some lenders would transfer the loan amount to your bank account within days.

5. You make monthly repayments. Peer-to-peer lenders report all individuals who cannot pay back their loans. CRBs keep the record and you retrieve it any time. Late payments may also come with late fees that increase the total amount of repayment. 

Advantages

Peer-to-peer lending provides some significant advantages to both borrowers and lenders. Both have various ways they benefit from the platform. Advantages of peer-to-peer lending includes:

1. Higher returns to the investors or higher profit maximization: Peer-to-peer lending provides returns or profit to investors through charging of interest rates. Late fees and other fees paid by the borrower are also part of the returns. g
2. More alternative and accessible source of funding: For some borrowers, peer-to-peer lending is a better option. They are not ready to go through the stress of the formal banking system. Some borrowers also with low credit scores see it as an alternative.
3. Lower interest rates: Peer-to-peer lending interest rate is often low and affordable because of the greater competition of financial institutions in Kenya.

Disadvantages  

Peer-to-peer lending comes with a few disadvantages and which includes:

• Credit risk: Peer-to-peer loans have much default probability because of the risk taken by lenders to give loans to borrowers with low credit scores.
• Lack of insurance/government protection and policy: The government does not provide any form of policy to govern the platform. No form of insurance or protection to the lenders in case of the borrower’s default.
• Legislation: Some jurisdictions are limited and do not allow some borrowers to borrow and some lenders to give out loans. It is required you conform to the regulations and when you do not; it affects the platform and the borrowers.

Some Peer-to-Peer Lenders in Kenya

Some of the peer-to-peer lenders in Kenya are:

• Kiva
• Zidisha
• Pezesha 
• UbaPesa 

The P2P lending platform in Kenya is still new with their continuous zeal in  connecting borrowers to lenders. 

They all use different models to give customers access to loans and have different interest rates and repayment terms. Before applying, ensure you compare different P2P lenders and read their terms.

Types of Loans Available Through Peer-to-Peer Lending

Peer-to-peer lending serves as an unsecured personal loan. It can be used for the same purposes as personal loans. Few loan types you may find on peer-to-peer lending websites are:

• Personal Loans
• Mortgage Loans
• Car Loans
• Student Loans
• Medical Loans
• Business Loans

The investing side of Peer-to-Peer lending

Becoming a Peer-to-peer is a gigantic business for investors and the investing side to this platform are:

1. Peer-to-peer lending helps investors earn extra income.
2. Through the platform, you can learn how to track your earnings from principal to interest and as your borrowers make their payments. You will also learn how to cash out or reinvest.
3. There is risk involved in the platform
4. There’s also a tendency of the lending platform itself shutting down. When borrowers don’t turn as suppose, you might lose a portion of the profit or investment.

Is Peer-to-Peer lending the right fit?

Peer-to-peer lending may be a better option for those who cannot qualify with banks and other lenders. Despite the sophisticated Fintech setup, people with fair credit can also apply and have it help them. 

For those who would wish to explore alternative financing sources, peer-to-peer lending might be right for them.

Special Considerations

People who are considering joining a peer-to-peer lending platform should:

1. Need to note about default rates, as do banks and other financial institutions. 
2. Any consumer or investor considering using a peer-to-peer lending platform should check the fees on transactions. Fees like origination, transaction and processing fees.
3. Know that each platform works differently but as unique features which includes credit score rating and interest rates.

Conclusion

Peer-to-peer lending platforms connect borrowers directly to investors or lenders. The platform decides the rates, terms and conditions and also approves all transactions. The lenders are individual investors or consumers who want to get a return on their cash savings. Finally, borrowers who seek alternatives to banks can patronize peer-to-peer lenders and still smile home.