The Illusion of "Free" and "Low Interest" Loans
Every day, millions of Kenyans receive enticing SMS messages: "Congratulations! You qualify for a FREE loan of KES 50,000!" or "Get instant cash at only 0.5% daily!"
These offers seem irresistible. After all, who doesn't want free money or rock-bottom interest rates?
But here's the uncomfortable truth: There is no such thing as a free loan. Every "free" loan and "low" daily rate has costs buried in the fine print that can make them 5-15x more expensive than traditional bank loans.
In this guide, we'll expose exactly how these fees work, calculate the true annual cost, and show you how to make smarter borrowing decisions.
The Hidden Fees in "Free" Loans
When a lender advertises a "free" loan or "0% interest," they're typically making money through:
1. Facility Fees (One-Time Charges)
Many mobile lenders charge a facility fee upfront, deducted from your loan amount before you receive it.
| Lender | Advertised | Facility Fee | You Actually Receive |
| M-Shwari | KES 10,000 | 7.5% (KES 750) | KES 9,250 |
| KCB M-PESA | KES 10,000 | 7.35% (KES 735) | KES 9,265 |
| Tala | KES 10,000 | 15% (KES 1,500) | KES 8,500 |
The trick: You pay back KES 10,000, but you only received KES 8,500-9,250. That's an effective interest rate of 8-18% for just 30 days!
2. Daily Access Fees
Fuliza is the most popular example. At 0.5% per day, it sounds tiny. But let's do the math:
- 7 days: 3.5% (reasonable for emergencies)
- 30 days: 15% (expensive!)
- 365 days: 182.5% (astronomical!)
If you keep a KES 10,000 Fuliza balance for a full month, you pay KES 1,500 in fees — equivalent to 180% annual interest.
3. Late Payment Penalties
Miss a payment date and watch the costs explode:
| Lender | Late Fee | Additional Daily Charge |
| Tala | KES 500 flat | +1% daily |
| Branch | 10% of balance | +1.5% daily |
| Fuliza | CRB listing after 90 days | Continues 0.5% daily |
4. Insurance Premiums (Mandatory)
Some bank loans require Credit Life Insurance that adds 0.5-2% to your loan amount. This is often not included in the advertised rate.
5. Excise Duty (Government Tax)
Kenya charges 20% excise duty on all interest and fees. If your interest is KES 1,000, you pay an additional KES 200 in tax.
Real Cost Comparison: KES 20,000 for 30 Days
Let's compare what you'd actually pay to borrow KES 20,000 for one month:
| Option | Advertised Rate | Actual Cost | Effective APR |
| Fuliza | 0.5%/day | KES 3,000 | 182.5% |
| M-Shwari | 7.5% facility fee | KES 1,500 | 90% |
| Tala | ~15% service fee | KES 3,000 | 180% |
| Branch | ~14% service fee | KES 2,800 | 168% |
| Bank Personal Loan | 18% p.a. | KES 300 | 18% |
| SACCO Loan | 12% p.a. | KES 200 | 12% |
The difference is staggering. A bank loan costs KES 300 while Fuliza costs KES 3,000 — that's 10x more expensive for the same amount!
Why Do People Still Use Expensive Mobile Loans?
Despite the high costs, mobile loans remain popular because:
- Speed: Disbursement in minutes vs. days for banks
- No paperwork: No payslips, bank statements, or guarantors
- No collateral: Unsecured lending
- Low barriers: Available to informal sector workers
- 24/7 availability: Apply anytime, anywhere
These benefits come at a price — literally.
When Mobile Loans Make Financial Sense
Mobile loans aren't always bad. They make sense when:
✅ True emergency (medical, car breakdown) and you'll repay within 7 days
✅ Small amounts under KES 5,000 where the absolute cost is low
✅ No alternative — you have no bank access or savings
✅ Business opportunity with returns exceeding the loan cost
When to AVOID Mobile Loans
❌ Recurring expenses (rent, school fees) — use bank loans
❌ Amounts over KES 20,000 — the fees become massive
❌ Repayment over 14 days — costs compound quickly
❌ Rolling over previous loans — debt spiral territory
How to Calculate True Loan Cost Yourself
Use this simple formula to compare any loan:
True Monthly Rate = (Total Repayment - Amount Received) ÷ Amount Received × 100
Example: Tala offers KES 10,000, deducts KES 1,500 fee, you receive KES 8,500, repay KES 10,000 after 30 days.
True Monthly Rate = (10,000 - 8,500) ÷ 8,500 × 100 = 17.6% per month = 211% per year
Compare this to a bank loan at 18% per year — the Tala loan is 12x more expensive.
5 Rules for Smarter Borrowing
Rule 1: Always Calculate the APR
Convert daily/monthly rates to annual rates for fair comparison. Use our M-Pesa vs Bank Calculator to see the true cost.
Rule 2: Borrow Only What You Can Repay Quickly
If using mobile loans, repay within 7 days. Every additional day costs you money.
Rule 3: Build Bank Relationships
Open a bank account, maintain regular deposits, and qualify for cheaper loans over time.
Rule 4: Join a SACCO
SACCOs offer the lowest interest rates (12-14% p.a.) but require membership and savings.
Rule 5: Build an Emergency Fund
The best loan is no loan. Even KES 10,000 in savings can prevent expensive emergency borrowing.
The Bottom Line
"Free" loans and "low" daily rates are marketing tactics, not reality. When you understand the true cost:
- Fuliza 0.5%/day = 182.5% per year
- M-Shwari 7.5% facility fee = 90% per year
- Bank loans at 18% per year are 5-10x cheaper
Use mobile loans only for genuine emergencies with quick repayment. For anything else, take the extra time to get a bank or SACCO loan.
Your future self (and your wallet) will thank you.
Tools to Help You Decide
📱 M-Pesa vs Bank Calculator — Compare loan costs side-by-side
🧮 EMI Calculator — Calculate monthly bank loan payments
💰 Affordability Calculator — See how much you can safely borrow
📊 Compare Personal Loans — Find the best bank loan rates in Kenya