What you need to know before taking a logbook loan in Kenya

Logbook loans offered by non-bank financial institutions in Kenya can come in handy when in need of quick credit especially for small businesses. They are increasingly becoming popular among Kenyans wishing to raise large amounts of money quickly.

But they are often misunderstood.

Propelled in part by the rate cap era (2016-2019) when banks drastically cut lending to small and medium enterprises (SMEs), non-deposit taking microfinance institutions (MFIs) stepped in to fill the gap with the logbook loan being one of their most successful products.

These credit-only institutions are not regulated under any legislation. A non-deposit taking institution in Kenya only needs to register as a private limited company to start lending operations.

But since this type of institution is not provided for in the Microfinance or Banking Acts, MFIs are not regulated by the CBK. Nevertheless, several MFIs have proactively applied for a digital credit provider (DCP) licence, including two that have already been approved by the CBK among the first 32 DCP licensees.

How logbook loans work

A logbook loan is a secured lending where your motor vehicle - private car, van, truck or other type of commercial vehicle - is used as the security.

You are not required to surrender your vehicle to the lender for the duration of the loan. Instead, the vehicle logbook record is amended at the National Transport and Safety Authority (NTSA) to reflect joint ownership between you and the lender.

You continue to use your vehicle as normal until the loan is fully repaid at which point the vehicle logbook is discharged at the NTSA back to your sole ownership.

The loan amount is determined by the value of your vehicle, which typically will be done by an independent valuer from a panel provided by the lender. The lender will then offer you a loan that is equivalent to a percentage of the determined value.

As such, the logbook loan is not for everyone; you need to have a car whose logbook is in your name, the vehicle age must be within the coverage of the lender and importantly, one has to have the risk capacity to put their vehicle on the line.

How much can I get?

Lenders use the Forced Sale Value (FSV) of your vehicle to determine the amount you can qualify to borrow against it.

Unlike the market value, which is technically how much your car is worth, the FSV is the amount the vehicle can fetch if it is put it up for sale for a period not long enough to allow for sufficient marketing.

It can be likened to a “distress sale” - where something must be sold quickly. Typically, the seller would have to accept a lower price than they would under normal circumstances.

According to data by Money254.co.ke - a financial marketplace - MFIs finance between 50 percent and 80 percent of the Forced Sale Value of a vehicle offered as collateral for a loan.

“From what we are seeing, there is no exact formula used to determine the FSV during the logbook loan application process. Our data show on average, about Sh200,000 or less will be hived off the valuer’s report (market value) to arrive at the Forced Sale Value,” Hilda Ng’ang’a, the Commercial Analyst at Money254 says.

For example, if you own a 2014 Subaru Outback with a market value of Sh2 million, the FSV could be around Sh1,800,000.

Now, lenders will only finance a percentage of the FSV, which among MFIs for your Outback will get you between Sh900,000 and Sh1.44 million as the maximum logbook loan amount.

How fast?

Speed is one of the biggest selling points for logbook loans offered by MFIs along with the ability to accept borrowers with less-than-perfect credit scores.

The logbook loan process begins with pre-approval where your documents are verified to confirm if you meet the minimum requirements. The next step is valuation where you may be required to pay a valuation fee depending on the lender.

After this, underwriting is done - to determine whether your financial statements and vehicle value qualify you for the loan. This is when the loan offer is made to you.

“Read the offer to ensure that you are fully aware of the terms, conditions, and obligations associated with the loan. You can also identify any charges and unexpected provisions not mentioned during the loan negotiation process,” Ng’ang’a advises.

If you accept the loan offer, you proceed to security perfection - where joint ownership of the vehicle is effected with the NTSA. Depending on the lender, you may be required to pay the NTSA in-charge fee.

Once this is done, the loan amount is disbursed to the bank account of your choice.

This entire process can be completed within 24 hours, at least as marketed, by some MFI logbook loan providers if the borrower has all their documents in order and actually qualifies.

According to insights from Money254, the time from application to disbursement ranges from 24 hours up to five days for most MFI loans.

What else you need to know about logbook loans?

Now cost is one of the sticky issues with logbook loans offered by MFIs.

Most logbook loans have a blend of percentage-based and fixed fees associated with them, which means the Annual Percentage Rate (APR) adjusts depending on the loan amount you are looking for (larger loans are relatively cheaper when you have fixed fees).

A logbook loan of Sh100,000 from an MFI attracts an APR of between 40 percent and 99 percent when all costs are included depending on the lender.

The marketed monthly rate of a logbook loan offered by an MFI in Kenya ranges from 3.1 percent to five percent. The monthly rate is important because many borrowers who choose these credit-only institutions are SMEs whose credit decision begins with a determination of what the business can practically afford to pay monthly and still meet all other obligations.

As well, many SMEs will use MFI logbook loans for working capital purposes with the intention of repaying early since several lenders in this category allow for early repayment with no penalties.

Apart from the interest rate and as alluded to above, there are a number of fees associated with logbook loans that you should be aware of. Upfront fees include logbook search, valuation, NTSA in-charge, car tracker, and processing fees.

Understanding how these fees are structured is vital in helping you know their impact on the total cost of the loan (TCC).

“Fees are either paid upfront, deducted from the disbursed amount or capitalised. If fees are capitalised, they become part of the principal, the loan amount increases, and interest is calculated on the higher total. So your TCC of a loan with capitalised fees will be higher than a loan where fees are deducted,” the Money254 Commercial Analyst explains.

If your vehicle doesn’t have a comprehensive insurance cover, with most MFIs, you will be required to get one or sign up for Insurance Premium Financing (IPF) through the same lender.

You can get an option to capitalise all the fees with several lenders in this category which saves you the need to raise these amounts upfront. However, this will increase your principal amount.

It is of utmost importance to inquire about and understand the lender’s vehicle repossession policy before making your choice.

You can compare your options on Money254.co.ke for free.