Borrowing wisely: how much loan can you really afford?

Your deposits may qualify you for a large loan, but the more useful question is: what can you comfortably repay every month, even when life gets expensive?

1. Start with the one-third rule

For salaried members, Kenya’s Employment Act limits total deductions from wages so that you keep at least one-third of your pay. Treat that as the absolute floor, not a target. If a new instalment would push your take-home pay close to that line, the loan is too big.

2. Work out your real monthly budget

List what you actually spend in a typical month:

• Rent or mortgage, food, transport and utilities
• School fees and other termly costs (divide them by the months they cover)
• Existing loan repayments, including mobile loans
• Support for family and regular contributions
• Your monthly SACCO savings — do not stop saving to repay a loan

What is left is the most you could put towards a new instalment. Aim to use no more than half of it, so you keep a buffer.

3. Check your debt-to-income ratio

Add up every monthly debt repayment and divide it by your gross monthly income. Many lenders become cautious above about 40%. Lower is safer.

4. Match the loan to its purpose

• Emergencies: borrow only what the emergency needs and repay quickly.
• School fees: choose a term that ends before the next term’s fees are due.
• Development or business: make sure the project’s benefit or income is realistic and arrives in time to support repayments.

5. Stress-test it

Ask yourself: if my income fell by a fifth for three months, could I still pay? If the answer is no, reduce the amount or lengthen the term — while remembering that a longer term means more interest overall.

A good loan improves your life after the last instalment. A bad loan only moves today’s problem into next year.

Before you apply

1. Use the loan calculator to see instalments, interest and charges.
2. Talk to your guarantors early and honestly about the amount and term.
3. Keep saving every month — it protects your future borrowing power.