My Sacco has sent me an email about the loans we are currently servicing. It is a thoughtful email.
They have given us options about what we can do to lighten the monthly burden of repaying these loans. Because, you know, coronavirus, uncertain times etcetera etcetera.
They have put these four options on the table. I have broken each down to understand how it applies to you as a borrower, and what you should be aware of as you consider exercising it.
Remember, all these options are temporary measures in response to the current pandemic. We don’t know how long it will last or how much longer it will take before our financial circumstances settle.
For whichever option you exercise, ask your Sacco if you can still revert to normal loan terms – repayment period of 48 months, 12 per cent interest rate – once the cat has been belled. Also ask how it affects your monthly contributions and annual dividends.
Option #1: Repurchase your loan
What the Sacco is saying here is that, on top of your current loan, you can borrow more money on new terms.
That is, a similar interest rate but for a longer repayment period – you will have a bigger loan, more money at your disposal but you will repay less per month.
You will also service this bigger loan for a much longer period and you will end up paying much more on the interest.
Say you had been regularly servicing your loan prior to the pandemic, and now had Sh500,000 left. You exercise this option and borrow more money, say Sh300,000. Your new loan balance is now Sh800,000.
You now have extra money to sort out any other financial emergencies that may have – or will – come up. Say rent, car or medical insurance, illness, employee salaries and whatnot.
Option #2: Consolidate all your loans
Here, the Sacco is offering to buy all the loans you have with other financial institutions and consolidate them into one huge Sacco loan.
That is your bank loan, your loan with another Sacco, your mobile-lending app loan and, if you try your luck, your shylock loan.
Again, we will assume you had a loan balance of Sh500,000. Your other loans are totalling to Sh100,000, this is the extra you borrow from your Sacco.
They will use this money to buy off your all these other loans. They will also extend your repayment period to 60 months.
You now only have the Sacco to deal with. Another plus is that Saccos offer the lowest rate of interest in the market – exercising this option means you will have more money from your income going back into your pocket at every payday.
The catch, again, is the interest you will you will end up paying.
Option #3: Restructure your loan
Restructuring your loan means that the balance you have on your current loan can become a new loan on a new repayment period with a new interest rate.
My Sacco gave this new repayment period as 84 months, and an interest rate of 13 per cent.
Exercising this option gives you some breathing room. Watch out for the ballooning interest though.
Option #4: Repayment proposal from you
My Sacco says it is open to engaging with borrowers so they can customise a repayment plan. I believe this is the best option because we are all swimming against these rough seas with different strokes.
Employees in the tourism industry felt the sting from as early as February and by March were either on compulsory unpaid leave or already had pay cut.
Industries such as media will begin to feel the pinch in May. Those in the telecomm industry may not feel the pinch at all.
You can flex your interest rate (to 12, 13 or 14 per cent) and your repayment period (to a maximum of 84 months) as a mash up of the better features from the other options.