Financial Terms Glossary
Every loan term explained clearly, with real examples.
The true yearly cost of a loan including interest and all fees, expressed as a percentage. APR is more accurate than the interest rate alone because it includes hidden charges.
Always compare APR — not just the interest rate — when choosing between loans.
Example: A loan advertised at 12% interest with processing fees may have an APR of 15%. That extra 3% is the real cost of borrowing.
An asset you pledge to the lender as security for a loan. If you fail to repay, the lender can seize and sell the collateral to recover their money.
Common collateral in Kenya includes land title deeds, logbooks (vehicle ownership documents), or fixed deposits.
Example: You take a KES 500,000 loan from a bank and use your car logbook as collateral. If you default, the bank can repossess and auction the car.
An institution licensed by the Central Bank of Kenya to collect and share credit information about borrowers. Lenders use CRB reports to decide whether to give you a loan and at what rate.
Being listed negatively on CRB ("blacklisted") can block you from getting credit anywhere in Kenya.
Example: You miss three loan payments at M-Shwari. M-Shwari reports you to CRB. When you apply for a bank loan six months later, the bank checks CRB and sees the negative listing and rejects your application.
Failing to repay a loan according to the agreed terms — missing payments, paying too little, or stopping payments entirely. Defaulting has serious consequences including CRB listing, legal action, and loss of collateral.
Example: Your loan agreement requires a monthly payment of KES 8,000. You miss two consecutive payments. You are now in default.
Interest calculated on the original loan amount throughout the entire repayment period — even as you pay down the principal. This means you pay interest on money you no longer owe.
Flat rate loans cost significantly more than reducing balance loans. A 10% flat rate is roughly equivalent to 18–20% reducing balance.
Example: You borrow KES 100,000 at 10% flat rate for 12 months. Interest = KES 100,000 × 10% = KES 10,000. You pay this KES 10,000 regardless of how much you have already repaid.
A person who agrees to repay a loan on your behalf if you fail to do so. Guarantors are legally bound — the lender can pursue them for the full outstanding amount if the borrower defaults.
Never guarantee a loan you cannot afford to repay yourself.
Example: Your friend asks you to guarantee his KES 200,000 SACCO loan. He loses his job and stops paying. The SACCO legally demands you pay the remaining KES 120,000.
The original amount of money you borrowed, before any interest is added. Your monthly payments go toward reducing the principal plus paying interest charges.
Example: You borrow KES 50,000 from a bank. Your principal is KES 50,000. As you make monthly payments, the principal reduces until it reaches zero.
Interest calculated only on the remaining unpaid principal each month. As you pay down the loan, the interest charge decreases because you owe less.
This is fairer and cheaper than flat rate interest. Used by most banks and SACCOs in Kenya.
Example: Month 1: you owe KES 100,000, pay interest on KES 100,000. Month 6: you owe KES 55,000, pay interest only on KES 55,000. Your interest cost drops every month.
Savings and Credit Cooperative Organisation. A member-owned financial institution where members pool savings and access loans at relatively low interest rates.
SACCOs in Kenya typically offer reducing balance loans at 12–14% per year — much cheaper than banks (14–18%) and far cheaper than mobile lenders (90–180% per year).
Example: You join a teachers' SACCO, save KES 5,000 per month for a year, and qualify for a loan of up to three times your savings — KES 180,000 — at 12% per year reducing balance.
The complete amount you will pay back, including principal, interest, and all fees. This is the most important number to look at before taking any loan — not the monthly payment, not the interest rate alone.
Always ask: "What is the total I will have paid when this loan is fully settled?"
Example: You borrow KES 100,000. Total cost of credit = KES 138,000. That means the loan costs you KES 38,000 extra — that is what borrowing actually costs you.