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The Why Series: Why Quick loans have an interest rate of up to 180% from the 15% stated

Most quick loans such as TALA Loan and Branch set their interest rate at around 15%, and is it? No! Not really, like you are about to find out, "the devil is in the detail".

Quick loans in Kenya have a way of making you think they are in the business of helping people. We'll I would hate to be the one to bust this bubble, but they are not. They might have catchy Adverts and polite, well-spoken agents that make you feel like the TALA loan agents are your helping hand in times of financial crisis, but believe me, Kenya Quick loans much like the politicians, are only in it for the money. The billions of profits recorded are born not from the savings but from the loan books.

Now, most Loan services say they offer loans with a 15% interest rate and is it? No! Not really, like you are about to find out, "the devil is in the detail".

The actual maths on Kenya quick loans

Say you take a loan of 1000. Great! at a rate of 15% that month you will pay TALA or Branch back 1,150.  You quickly get a message back saying you can now borrow 5,000. The problem is  This is another 5000 you did not have meaning paying it back may be a problem.

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You do manage to pay back the quick loan the following month but since your finances are stretched you take another loan immediately. This time they offer you 7000.

While banks offer you a yearly interest on loans Quick loans are monthly loans and so is their interest. You end up taking a 15% loan on a monthly basis all year round. In the end, the interest is that initial 15% multiplied by the total number of months you took the loan continuously, hence a 180% interest rate.

Let's say you take a 5000 loan every month for 12 months. Each month you will pay back 750 shilling. By the end of the year, you would have paid 9000 shillings. This is an amount bigger than the actual money you had taken.

Insurance fee.

While most of us like having a safety net going through life, one detail that many clients fail to notice getting into bed with Kenyan loan services is that the principal money loaned to you is insured. Sounds good and safe but guess who insurers it? Well, you. The money is deducted in your principal before you get it into your account. This is not all, the fee is annual as long as your in debt.

Processing fee.

When Payday loans in Kenya Give you a loan, you'd think they have it processed or at the very least they'd be responsible for any fee involved in processing the fee. Surprise, surprise, the millions of bonuses awarded to managers don't come from the hard work, it's the way they maneuver the system. With every loan awarded, comes a processing fee, which ones again comes from the principal amount. This fee depends on the bank and goes as high as 4% of the principal.

Interest on interest.

The headline sounds absurd but quick loans services in Kenya have a clever way of saying it, its Compound interest. This has been a system that can be used to make investors vastly rich but guess what Kenyan banks use it for?

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Compound interest is a calculation method that combines the principal and also accumulated interest of previous periods. Hence the interest on interest nickname. The simple and more effective way would be the Simple interest which is only calculated on the principal, but as I said, someone has got to get the fat bonuses.

Are Saccos any better

Now, before you run to a Sacco thinking they are the way to get financial Aid, consider this, you are told to save money for a certain time and get three times the amount. Save 100,000 and get a 300,000 loan, then you will pay back the 300,000 plus a little (well, compared to banks) interest. But dint 100,000 of the 300,000 you get and payback yours in the first place?

All in all, most financial "aids" in the country are only in it for their own development and the next time a loan officer tells you they have a 15% interest rate, tell them you want to see the maths, and the devil in the detail shall appear.

What is the solution

TO be quite frank there is no direct solution. We all need these institutions. But you have to remember they are businesses and not charity organizations.

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