Managing Bank Loans, Amortization, and Interest Rates
Taking a commercial bank loan or mortgage in Kenya requires analyzing the true cost of debt. Banks quote interest rates based on the CBR benchmark (Central Bank Rate), adding a custom premium depending on your credit profile.
How to Minimize Your Cumulative Loan Cost:
- Negotiate Reducing Balance: Always opt for a "reducing balance" loan instead of a "flat rate" loan. Reducing balance calculations mean you only pay interest on the outstanding debt balance, saving you hundreds of thousands over time.
- Make Extra Payments: Whenever you receive a bonus or windfall, pay it directly towards your loan's "principal amount". This reduces the amortization timeline and cuts future interest costs.
- Expose Processing Fees: Be aware of auxiliary charges like legal fees, valuation costs, excise duty on processing, and facility fees, which increase the Annual Percentage Rate (APR).