In an ideal world, taking a loan would be simple. Apart from filling out the paperwork and receiving approval all you would need to know is the amount of interest you have to pay. Take out Ksh100,000 at 5% and your total repayment sum comes to Ksh105,000. But, depending on the terms of your finance, on top of this you’ll need to consider any additional costs such as processing fees, etc.
Simple, right? In theory, yes. The confusion starts to set in once you factor in APR (Annual Percentage Rate).
Before we move on to look at the specifics of APR, let’s start with some very basic explanations.
What exactly is an interest rate?
An interest rate is a fee, calculated as a percentage of the total loan amount, that you are charged for borrowing money. Most lenders refer to this as a base rate.
What is APR?
APR stands for Annual Percentage Rate and is an important factor in determining the overall cost of a loan. When you arrange a loan with a Bank, their offer can include additional fees charged by your lender. Included in the cost are insurance, legal fees, stamp duty valuation fees and other third party costs. The APR figure takes that information into account, giving you a simple percentage interest rate to allow you to compare and shop around. Overally, the APR you’re shown is higher than the base rate that lenders use to advertise their loan offerings.
The recently launched loan calculator by the Kenya Bankers Association is designed to show you how much your loan is going to cost. It shows the monthly payments based on the loan term and the annual percentage rate (APR) you choose. As well as monthly payments, the calculator comes up with the total amount repayable and the actual cost of the loan.
The APR interest rate you’ll be charged depends on your personal circumstances. You can compare the cost of different deals by changing the loan term or amount you want to borrow. Or you can enter your monthly budget and let the calculator tell you know how much you can borrow and over what length of time.
Personal loans
Many of us take out a personal loan at some point to cover the cost of a big purchase such as a car, to fund home improvements, or perhaps to pay for a wedding or for other personal uses.
Unless you’ve got substantial savings, then a loan is often the only way to get hold of a lump sum. But make sure you understand exactly what you’re signing up for.
There’s usually a maximum amount you can borrow with a personal loan, and if you want to borrow more, you’ll need to put down security, such as your car or home. That can be complicated, or even impossible if you’re renting.
Most loan terms run from a year up to five years. The longer the loan term you choose, the lower monthly payments will be, but the more interest you will pay overall.
Rates are usually fixed unless otherwise, so the amount you pay each month will remain the same throughout the loan term.
Before applying for any loan, you can use the www.costofcredit.co.ke platform to compare different loan offerings in order to get the best.
As with any form of lending, it’s important to understand the terminology that money lenders wrap around their offers. But, even more important, having a reliable tool you can use to work out the financial impact of borrowing money will stand you in excellent stead before you even start the application process that’s why the banking industry under Kenya Bankers Asoociation in collaboration with Central Bank collaborated to give you an accurate view of both the interest and APR payments you’ll be required to meet.
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