No such thing as low interest rates

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No such thing as low interest rates.
We have all seen the ads 9.5% interest rate, 10.5% interest rate, 14.5% interest rate…. After the ads I must admit I hated by current banker, I mean here is another bank offering loans at 9.5%, 10.5%, 14.5% and my bank is offering the same loan at 18.5%??? Ridiculous
Immediately I went out to find out more about the seemingly cheaper, more affordable loans. On the surface of it, the loans were legit and to my surprise the offer actually held water. Then the old adage ‘ The Devil is in the detail’ the proverbial fine print in small caps and equally small font came to bear.

I discovered the KBA APR calculator and from it my eyes were opened.  The calculator is available for download on various app stores (http://www.cost-of-credit.com/index.php/site/downloads ).
According to The Kenya Banker’s Association APR which simply stands for Annual Percentage Rate pricing mechanism, will enable consumers to compare different bank loan costs based on standardized parameters and a common computation model. (Yah I know kizungu mingi)
Long story short, having downloaded the APR calculator to my phone I proceeded to calculate the difference between my 18.5% annoying bank and the cheapest 9.5% offer.
So step one go to the calculator and avoid the temptation of the tab ‘Quick Estimate’ opt for APR CALCULATOR.


Step two enter the variables

At this stage all you need is to go to the tab ‘Type of interest Rate’ that is where the devil and the detail is. There are two options: Reducing balance and Straight line.
 I found out that the 9.5% guy will only give me the loan at 10.5% now this is because am a new customer and my employer does not have an existing agreement with the institution. And revelation two is that the loan is on a straight line interest rate. (The straight line method of calculating interest requires that you repay an equal amount of interest, usually monthly, over the life of a loan.) there is the devil.
Step 3 enter the loan amount and interest rate along with the period. For illustration let’s say 1 Million at 10.5% for 46 months.


Go to the bottom and press calculate
Wait for the kicker.
Do the same for my ridiculous bank that tells me the rate is 17.5% but once again no deal with my employer so I can get a loan at 18.5%. They also tell me my interest is on Reducing Balance  and not Straight line  like the 10.5% guy.

Now the results
The 10.5% guy will charge me an APR of 24% (the catch line was 10.5% interest) 


My ridiculous 18.5% bank will charge me an APR of 24% (yes they are the same)

On your mobile phone it will tell you that the 10.5% guy charged you an APR of 20.55% and the total interest was Ksh. 402,500 and in total you paid Ksh.1,437,500. This means the cost of credit was Ksh. Ksh. 437,500.
My ridiculous bank which I now love for not going to Advertisement way charged you an APR of 20.6% (round off the other) at a total interest rate of Ksh. 403,523 and a total payment of Ksh. 1,438,523. Total cost of credit Ksh. 438,523.
In reality the 10.5% guy is 1,023 shillings cheaper, but wait he asked you for 6 months bank statement that cost you say Ksh. 500 to 2,000 from your former bank, you had to travel back and forth to set up the new account say Ksh, 2,000 and let’s not forget you had to reroute you salary to the new bank wait for the first salo…
Shock horror…. Yes.
So what is the difference?
Its quite simple ‘the wording’
Straight Line vs Reducing Balance.
#ItsJustAnAdvertisement

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