Transcript
Joy: Welcome to SACCO Management — practical ways to run a healthier SACCO. I'm Joy, and with me is James. Today: pricing a loan — fees, interest and penalties.
James: Happy to be here, Joy. This one matters because a loan's real price is more than the rate on the poster.
Joy: So what makes up the full price?
James: Four things together — the fees, the interest method, the penalties, and the repayment period. Members deserve to see all of it before they sign.
Joy: And where does the money we lend actually come from?
James: From the members themselves — their savings, deposits and share capital. When Mama Achieng borrows, she's borrowing the pooled money of her fellow members.
Joy: So fair pricing is really about protecting that shared fund.
James: Exactly. Price the loan to protect the fund, not to punish the borrower. It's a duty to the whole membership.
Joy: Let's start with fees. What's fair?
James: A clear, reasonable processing fee — a small percentage or a flat amount, written in your loan policy. It covers the real cost of appraising the loan.
Joy: Any traps to avoid?
James: List every charge — application, insurance, valuation, whatever applies. And don't stack lots of little fees that quietly add up. Members notice, and trust erodes fast.
Joy: Now the part that confuses people — reducing balance versus flat rate. Explain it simply?
James: Sure. With a flat rate, you charge interest on the original loan amount for the whole term. So the member keeps paying interest on money they've already repaid.
Joy: And reducing balance?
James: Reducing balance charges interest only on what's still owed. As the member repays, the balance shrinks, so the interest shrinks too. Same ten percent costs them far less.
Joy: So the rate can look identical but the cost is very different.
James: Right. Reducing balance is fairer and clearer — always prefer it. If you ever quote a flat rate, show the equivalent reducing-balance cost too, so nobody is misled.
Joy: What about late-payment penalties?
James: Disclose them up front in the agreement — the amount and when it applies. Keep them proportionate, and charge only on the overdue amount, never the full loan.
Joy: The goal isn't to profit from someone's hard month.
James: No. It's to bring the account back on track. Speak to a struggling member before you penalise them.
Joy: And before disbursing?
James: Set a maximum repayment period in your policy, matched to the loan's purpose. Then give the member the total cost — principal, fees, all the interest — plus a repayment schedule showing each instalment and the shrinking balance. In CAMS you can generate that schedule and hand it over on the spot.
Joy: That's what turns a nervous borrower into a confident, returning one.
James: Every time. Transparency is the whole game.
Joy: The takeaway: price every loan on the reducing balance with fees, penalties and the full cost disclosed up front, because you're protecting the members' own savings. Thanks James, and thank you for listening to SACCO Management.