Understanding the Real Cost of Obtaining a Loan in Kenya

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When considering an investment, it's crucial to delve beyond the surface interest rate disclosed by banks. In Kenya, while the current capped interest rate for bank loans stands at 13.98 per cent (as of September 2023), there's a cluster of hidden expenses that significantly contribute to the overall cost, often overlooked by borrowers.

Here's a comprehensive breakdown of five essential charges that investors should be aware of:

Government Taxes:

Banks impose exercise taxes on loan charges, typically at a rate of 20 per cent. For instance, on bank fees ranging between Ksh20,000 to Ksh40,000, an additional excise charge of Ksh4,000 to Ksh8,000 per loan application applies. These hidden taxes considerably augment the initial interest rate.

Loan Application/Processing Fees:

These encompass various charges like appraisal, negotiation, and loan arrangement fees. While some banks subtract these fees from the loan amount, others demand upfront payment from the borrower. Varying across lenders, these fees, usually a percentage of the loan, substantially escalate the borrowing cost.

Legal Costs:

Collateral involvement in loan applications prompts banks to engage lawyers for due diligence on the pledged property. From verifying ownership and regulatory compliance to handling property charging and release processes, these legal procedures add expenses. Additionally, some lenders employ external legal assistance, further increasing the borrower's financial burden. 

Credit Life Insurance: 

This mandatory third-party fee safeguards lenders in scenarios where borrowers are unable to service the loan due to unforeseen circumstances like death, disability, or job loss. Termed as loan protection cover, borrowers pay a premium to compensate lenders in case of default. Typically, this insurance fee ranges from 0.4 per cent to 0.6 per cent of the loan amount, adding to the overall borrowing cost.

Valuation Fees and Stamp Duty:

Borrowers utilizing assets like land, vehicles, or properties as collateral incur expenses related to valuations. Banks necessitate valuations to ensure adequate coverage for secured loan facilities. Moreover, home loans attract stamp duty levied by the Kenya Revenue Authority (KRA) at 4.0 per cent of the property's market value and an additional 0.1 per cent of the loan amount when charging the property for collateral purposes.

For you as an investor, comprehending these hidden charges associated with borrowing is integral. They significantly influence the actual cost of capital, impacting investment decisions and return calculations. Examining these intricacies beyond the stated interest rate empowers investors to make informed financial choices and accurately assess the viability of potential investments.

But why worry about the hidden charges and interest rates when you can make money online through various investment products available at FNFCOM.

Explore the opportunities available including making Ksh4,500 daily through the FNFCOM’s Airtime Distribution System.

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