With the rise of the digital loan lending market in Kenya, there is no doubt that access to credit has become much more accessible, with millions able to access quick loans. You can access quick loans from multiple sources, such as digital lending apps, mobile bank loans, Sacco loans, and logbook loans.
In this article, we’ll examine some of the pros and cons of a loan in Kenya.
Pros and Cons of Taking a Personal Loan in Kenya
Taking out a loan can be beneficial in many scenarios, however, it is important to weigh the advantages and disadvantages before entering into an agreement. Generally speaking, the primary pro to taking out a loan is that it provides access to funds that you would otherwise not have.
Advantages of Taking Loans
Taking out a loan can be an excellent way to bridge financial gaps and meet short-term needs. Therefore, the advantages of using personal loans should not be overlooked.
1. Loans build your credit score
You have much to lose if lenders negatively list you on CRB or other credit regulatory bodies in the country. However, one way to turn things around and obtain a positive rating is by taking personal loans and repaying them on time.
Mobile lenders will list you positively and thus improve your credit rating.
Your credit rating will improve if you consistently take up personal loans and pay on time. Your credit will place you in a better potion to access loans from other institutions such as banks and saccos in the future. However, you risk further damage to your credit score if you do not repay your loans on time.
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2. Instant access to capital
The main reason why individuals access personal loans is to gain access to capital. You may need access to instant cash to facilitate your business or a personal emergency. Rather than going through your contact list looking for old friends who can come to your rescue, you can always opt for a personal loan to save the day.
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3. Flexible borrowing limits
Personal loans in Kenya are very flexible when it comes to borrowing limits. These lenders often allow you to select the loan amount based on your current financial needs and loan limit. You can choose a loan amount that suits your needs as a customer. This flexibility could be vital as it helps you to avoid paying excessive interest rates.
4. No need for collateral
Most of the vast loan applications in banking institutions often require you to provide the loan securities, complicating the tedious process and making it harder for borrowers to access credit. Personal loans, on the other hand, do not require securities, which simplifies the process of securing the loan.
Disadvantages of taking Loans
Some notable drawbacks of taking out loans include high-interest rates resulting in costly paybacks over time and entering into debt, which could take years to pay off.
1. High-interest rates
Borrowing money comes at a cost. This cost is often calculated as interest paid to the lender after the agreed period. The interest pays the lender the profit for the capital they extend to the borrower. Some quick loans may come at very high interest. Interest accumulates over time, meaning taking longer to pay will also mean higher interest.
2. Risk of negative listings
Once you take a loan, you must repay it on time. Keeping this in mind will ensure that you avoid a negative listing. However, if the loan exceeds the repayment date, the loaning company will list you with the Credit Reference Bureau (CRB) as a default affecting your future credit chances.
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3. Impact your Financial goal
Taking loans can lead to an overreliance on loans, which might be hazardous to your financial goals because debt accumulates interest, which may become more than your income with time. At this point, you may need to use all your income to service your debt or risk being listed by the CRB, making it even more difficult to advance in your financial goals.
4. Unhealthy Financial behaviours
Being overreliance on debt may lead to the development of unhealthy financial behaviours. It inhibits your capacity for savings and affects your budgeting skills. Taking unnecessary debt is the first step towards bad financial behaviour.
Loans can be a great source of money for those in need. However, it is vital to ensure that you understand the implications of taking out a loan and how it might affect your credit rating. In addition, make sure you evaluate your ability to pay off the loan before applying for one. This will help avoid negative listings with CRB or being locked in a vicious cycle of debt. In conclusion, personal loans can be an excellent way to access capital when done responsibly.
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