Three things you must know before taking a loan

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

05 February 2023

A reader by the name Justus wants to know how loan payments are calculated. He says that he read a newspaper article in which a financial expert stated that the monthly installment for a Sh400,00 loan is Sh10,500 for 48 months. He only goes on to say that he has a Sh450,000 loan for which he pays Sh14,000 per month adding that “this has been the norm since I retired 12 years ago”

Upon receiving his email, I asked Justus for two basic things: first, the interest rate on his loan and, second, the duration/term of the loan. His reply was somewhat confusing. He thinks the interest is 11 per cent, but not certain about it; and that the term is four years. Now I wondered: how can the lender continue deducting payments for 12 years yet the term was just four?

This case illustrates the biggest problem borrowers have: they do not take time to understand what they are getting into. There are too many people who write to me asking this type of question but they do not have the basic information. Before you take a loan, ensure that you know three things: (1) how much money you are borrowing, (2) the interest rate and (3) the duration you have been given to pay back.

Without these three, it is impossible to work out the amount you are required to pay every month. Assuming that the figures Justus gave me are correct – Sh450,000 at 11 per cent for 4 years – it turns out that he should be paying Sh11,631. And those deductions should have stopped at the end of the fourth year.

If he is paying Sh14,000, it means that the interest rate is over 21 per cent! And if the deductions have been going on for the last 12 years, then there is something very wrong. The lender has stolen a lot of money from him.

At Sh14,000 per month, the loan should have been cleared in just three years; all the money paid after that should be refunded. It comes to Sh14,000 x 9 years x 12 months = Sh1,512,000. If we add interest at the same rate as the loan (it is only fair), the total is almost Sh3 million.

My advice to Justus is that he should go to the lender and demand to be given the basic information about his loan and then demand to be paid the Sh3 million.