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Sacco loans Versus Bank loans
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heri
#1 Posted : Saturday, December 19, 2015 12:22:46 PM
Rank: Member

Joined: 9/14/2011
Posts: 869
Location: nairobi
I have always assumed that using sacco loans for development is not always the cheaper option

This is because to secure say a Kshs 3M loan at 12% pa you need to have a saved kshs 1M in the sacco which earns say interest at about 9% per year

But i think if i get a bank loan at say 18% pa i can then invest the 'potential sacco savings' and generate a higher return say at 15% per year

But with my bank having increased my interest rate to 24% ( they claim their cost of deposits is now higher) am wondering whether my assumptions are still valid

Your comments are welcome
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Sevian
#2 Posted : Saturday, December 19, 2015 2:00:19 PM
Rank: New-farer

Joined: 4/8/2015
Posts: 42
heri wrote:
I have always assumed that using sacco loans for development is not always the cheaper option

This is because to secure say a Kshs 3M loan at 12% pa you need to have a saved kshs 1M in the sacco which earns say interest at about 9% per year

But i think if i get a bank loan at say 18% pa i can then invest the 'potential sacco savings' and generate a higher return say at 15% per year

But with my bank having increased my interest rate to 24% ( they claim their cost of deposits is now higher) am wondering whether my assumptions are still valid

Your comments are welcome


Each has its strength and weakness
Sacco strengths
1. Cheaper than most bank loans (99%)
2. Interest rate stays at 12% for the basic loan. There are other packages available at very different rates including one I saw at 10% p.m. depending on the add on feature (fast processing, top up, etc etc)
3. Is not dependent on income/cash flow: since it's based on shares held, given as a multiple of the same: can be triple or quintuple. Good especially for non salaried business people
4. Interest is fixed.
5. Most saccos have common bond (common factor eg profession, employer, etc) so are very friendly and personal
6. Some saccos like mine gives loans at 12% for up to 8 years (above a certain amount)

Disadvantages
1. Long processing period: often 30 working days (6 weeks), unless you are taking another (more expensive option - my Sacco gives a 2 week swift loan - at 16% p.a.)
2. Guarantors can be hell to find especially with increasing amounts. And each cent lent out must be guaranteed
3. Interest on your deposits are ridiculously low: 6% pa and below in most.
4. Long queues in some saccos waiting for loans so it "helps" kujuana. But only in some very large and govt affiliated like Afya and Kilimo

My experience and observation with sacco loans is much better than bank loans. The 30 day processing 'wait' means no overnight 'bright' harebrained ideas, lazima nipange mikakati. And I have realised that organic growth in sacco deposits is very useful as I take on progressively bigger projects.

So a sacco must needs both patience and planning.
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quicksand
#3 Posted : Saturday, December 19, 2015 3:41:13 PM
Rank: Veteran

Joined: 7/5/2010
Posts: 2,061
Location: Nairobi
heri wrote:
I have always assumed that using sacco loans for development is not always the cheaper option

This is because to secure say a Kshs 3M loan at 12% pa you need to have a saved kshs 1M in the sacco which earns say interest at about 9% per year

But i think if i get a bank loan at say 18% pa i can then invest the 'potential sacco savings' and generate a higher return say at 15% per year

But with my bank having increased my interest rate to 24% ( they claim their cost of deposits is now higher) am wondering whether my assumptions are still valid

Your comments are welcome

The flaw in your thinking stems from the assumption that 'potential sacco savings' just miraculously happens to be there. Your starting point is 1 million shillings ahead. In real life, you have to work, live, scratch and claw like a tunnel rat and develop a strong saving habit over some long bit of time before that milli tops out.
The 2 situations are not comparable. Its apples to oranges. Its either you need 3 million, or 4 million, now, for something urgent. Then you go to the bank and eat the full market interest rate -or, you are willing to wait and save in the interim, let the money lie idle so as to get cheaper Sacco credit. This 'investing the 1 million' is a figment of the imagination cause either the million is not there, or the million is tied up.
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The optimist
#4 Posted : Wednesday, February 17, 2016 8:19:44 PM
Rank: Member

Joined: 6/14/2010
Posts: 521
Location: Nairobi
Let’s take a Case of Ksh 1Million Loan

To qualify to borrow this amount I need to have raised 1/3 of the same of course with a guarantee of other members to get the remaining 2/3rd covered.

I'll be happy to say that I have secured a 1M loan from my Sacco at 12% interest per annum (Or 1% per month as they normally put it).
This of course boils down to a repayment of ksh 21,935.69 for five years.
For purposes of clarity
Loan: Ksh 1Million
Interest rate: 12% Pa on reducing
Period: 5 years(60 months)
monthly repayment: Ksh 21,935.69


Reality is shocking!
You have actually borrowed your own money at exorbitant rates!

Let's look at the argument again.
To qualify for a ksh 1M loan, you need to raise 1/3 that amount ie: Ksh 333,333 to be precise.
In that case the real money you have borrowed from your Sweet Sacco is Ksh 1m – 333,333 which is Ksh 666,666.67 with a repayment of Ksh 21,936 per month for five years.
Let’s see how much the interest will be for the second scenario(Reality).

Loan: Ksh 666,666.67
Interest rate:35.664% on reducing
Period:5 years(60 months)
Monthly repayments:21,935.69

Now we say Banks are expensive at 21% etc.
Who is more expensive?
Your Sacco or your Bank?
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Lolest!
#5 Posted : Wednesday, February 17, 2016 8:52:57 PM
Rank: Elder

Joined: 3/18/2011
Posts: 12,069
Location: Kianjokoma
optimist,

The Sacco money is just a security like a plot of land. An interesting security because it will still earn you a dividend annually(some in another thread claim they're paid up to 20%

If you needed 1M today, you will not start saving in a SACCO. You will go to them and borrow based on the deposits with them. You do not just walk there give them 333 and then expect them to give you 1M. You will have saved that 333 over some time

In your bank example, you needed 1M, you've borrowed 667. Where will you get 333 from???
Laughing out loudly smile Applause d'oh! Sad Drool Liar Shame on you Pray
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Impunity
#6 Posted : Wednesday, February 17, 2016 9:00:09 PM
Rank: Elder

Joined: 3/2/2009
Posts: 26,331
Location: Masada
The optimist wrote:
Let’s take a Case of Ksh 1Million Loan

To qualify to borrow this amount I need to have raised 1/3 of the same of course with a guarantee of other members to get the remaining 2/3rd covered.

I'll be happy to say that I have secured a 1M loan from my Sacco at 12% interest per annum (Or 1% per month as they normally put it).
This of course boils down to a repayment of ksh 21,935.69 for five years.
For purposes of clarity
Loan: Ksh 1Million
Interest rate: 12% Pa on reducing
Period: 5 years(60 months)
monthly repayment: Ksh 21,935.69


Reality is shocking!
You have actually borrowed your own money at exorbitant rates!

Let's look at the argument again.
To qualify for a ksh 1M loan, you need to raise 1/3 that amount ie: Ksh 333,333 to be precise.
In that case the real money you have borrowed from your Sweet Sacco is Ksh 1m – 333,333 which is Ksh 666,666.67 with a repayment of Ksh 21,936 per month for five years.
Let’s see how much the interest will be for the second scenario(Reality).

Loan: Ksh 666,666.67
Interest rate:35.664% on reducing
Period:5 years(60 months)
Monthly repayments:21,935.69

Now we say Banks are expensive at 21% etc.
Who is more expensive?
Your Sacco or your Bank?


Sasa kishwa yangu yaniuma.
Sad
Portfolio: Sold
You know you've made it when you get a parking space for your yatcht.
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Impunity
#7 Posted : Wednesday, February 17, 2016 9:03:08 PM
Rank: Elder

Joined: 3/2/2009
Posts: 26,331
Location: Masada
Now if you borrow Kes.1M from sacco if your share/saving is Kes.333,333 do you lose the 333,333 savings?
Portfolio: Sold
You know you've made it when you get a parking space for your yatcht.
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Lolest!
#8 Posted : Wednesday, February 17, 2016 9:09:06 PM
Rank: Elder

Joined: 3/18/2011
Posts: 12,069
Location: Kianjokoma
Impunity wrote:
Now if you borrow Kes.1M from sacco if your share/saving is Kes.333,333 do you lose the 333,333 savings?

No. You only lose the chums if you don't repay. These chums continue earning you dividends. Optimist's argument is too simplistic
Laughing out loudly smile Applause d'oh! Sad Drool Liar Shame on you Pray
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Angelica _ann
#9 Posted : Wednesday, February 17, 2016 9:34:24 PM
Rank: Elder

Joined: 12/7/2012
Posts: 11,935
Lolest! wrote:
Impunity wrote:
Now if you borrow Kes.1M from sacco if your share/saving is Kes.333,333 do you lose the 333,333 savings?

No. You only lose the chums if you don't repay. These chums continue earning you dividends. Optimist's argument is too simplistic

That calculation is tafash smile d'oh!
In the business world, everyone is paid in two coins - cash and experience. Take the experience first; the cash will come later - H Geneen
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bird_man
#10 Posted : Wednesday, February 17, 2016 10:10:03 PM
Rank: Veteran

Joined: 11/2/2006
Posts: 1,206
Location: Nairobi
The optimist wrote:
Let’s take a Case of Ksh 1Million Loan

To qualify to borrow this amount I need to have raised 1/3 of the same of course with a guarantee of other members to get the remaining 2/3rd covered.

I'll be happy to say that I have secured a 1M loan from my Sacco at 12% interest per annum (Or 1% per month as they normally put it).
This of course boils down to a repayment of ksh 21,935.69 for five years.
For purposes of clarity
Loan: Ksh 1Million
Interest rate: 12% Pa on reducing
Period: 5 years(60 months)
monthly repayment: Ksh 21,935.69


Reality is shocking!
You have actually borrowed your own money at exorbitant rates!

Let's look at the argument again.
To qualify for a ksh 1M loan, you need to raise 1/3 that amount ie: Ksh 333,333 to be precise.
In that case the real money you have borrowed from your Sweet Sacco is Ksh 1m – 333,333 which is Ksh 666,666.67 with a repayment of Ksh 21,936 per month for five years.
Let’s see how much the interest will be for the second scenario(Reality).

Loan: Ksh 666,666.67
Interest rate:35.664% on reducing
Period:5 years(60 months)
Monthly repayments:21,935.69

Now we say Banks are expensive at 21% etc.
Who is more expensive?
Your Sacco or your Bank?


If you went to your bank with a payslip that can pay 22k per month...assuming your net after major expenses is 30k.What loan amount do you think they would give you?1M unsecured?I highly doubt.

Also note that the 333,333sh will earn you close to 100k in dividends over the 5yrs if rate is 6%.
Formally employed people often live their employers' dream & forget about their own.
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