What you need to know about the fees hidden in fine print in logbook loans 

This is the third article in an ongoing series on logbook loans in Kenya. Click here to read the first article and here for the second.

If you need financial assistance for various reasons and you own a car, you probably have come across the logbook loan option. 

In Kenya, these loans have gained popularity due to their swift processing and minimal requirements, with many microfinance lenders (deposit-taking and credit-only) providing approval within 48 hours or less. 

However, it’s important to be well-informed about the costs involved, particularly on logbook loan fees, which can significantly impact your total cost of credit. 

“Many borrowers make the mistake of focusing solely on the interest rate only to realise later in the process that additional fees such as processing and third-party fees materially affect the cost of the loan,” says Hilda Ng'ang'a’, the Commercial Analyst at Money254.co.ke, a financial marketplace. 

While the annual interest rate for logbook loans offered by microfinanciers in Kenya currently ranges from 30 percent to 120 percent, according to Money254 Insights, fees can be less straightforward. 

Logbook loan fees are the charges imposed by lenders to cover the costs associated with reviewing, processing and underwriting the loan. 

They exist majorly because while it is generally already hard to securitise a loan, microfinance lenders have to also make large, fast and risky loans viable. 

To do this, they depend on several third parties such as valuers, the National Transport and Safety Authority (NTSA), credit reference bureaus, and car track companies, among others. As such, a majority of these fees go to different parties and not the lender. 

When the fees are added, the Annual Percentage Rate (APR) range of microfinance logbook loans jumps to between 51 percent and 115 percent. 

Borrowers need to be aware of these fees to accurately assess the total cost of the loan and avoid any surprises during the repayment period. 

Upfront fees

When applying for a logbook loan, one of the first things the lender has to ascertain is the ownership of the vehicle. This is through the NTSA TIMs portal where a logbook search fee of between Sh500 and Sh3,000, depending on the lender, is applicable. 

Next is to determine if your car qualifies as collateral. A valuer (in-house or independent) assesses your vehicle and provides a valuation report that details the market value and the Forced Sale Value (FSV) of your car. 

The FSV is the amount your vehicle can fetch if it was put up for sale for a period not long enough to allow for sufficient marketing. It may be up to 25 percent lower than the vehicle’s market value. 

Valuation attracts a fee ranging from Sh2,000 to Sh5,000 for saloon cars and SUVs and is charged upfront, before loan approval. For bigger vehicles such as lorries and trucks, the cost of valuation may be higher. 

For lenders using third-party valuers, this fee is non-refundable whether the vehicle ends up qualifying or not. This is because the valuer will invoice the lender for work done regardless of the outcome. Some lenders, however, may take a risk and cover this fee. 

If your income documentation proves you can afford the loan (typically checked before paying for car valuation) and your car has passed valuation, you will be given a loan offer which if you accept, the process of collateral perfection is initiated. 

Collateral perfection protects the lender’s ability to take possession of the collateral in the event of default. The first step in the collateral perfection process is the logbook in-charge process where the logbook is amended to reflect a joint ownership of the vehicle between you and the lender. This attracts a Sh1,175 fee. 

Once you repay the loan fully, the logbook will be discharged back to your sole ownership attracting a fee of Sh3,000 on average depending on the lender. Some lenders will charge a combined fee upfront for both in-charge and discharge which averages at Sh4,000. 

Next in the collateral perfection process is the installation of a car tracker by a third-party car track company. While some lenders may offer free installation, most charge a one-time fee ranging from Sh4,000 to Sh7,500 paid to the third-party installer. Other lenders charge a monthly car tracker maintenance fee of between Sh1,400 and Sh2,000 while others will charge both an installation fee and a monthly tracker fee. 

For a majority of lenders and certainly, for all loan amounts above Sh500,000, your car must be comprehensively insured to be used as collateral. This ensures that the lender has confidence in the vehicle’s protection against both minor and major damages caused by uncontrollable factors. By having comprehensive insurance, the lender can recover their loan balance even if an incident occurs. 

The cost of comprehensive insurance varies on factors such as the vehicle’s age, value, and the owner’s risk profile. Money254.co.ke Insights indicate that the cost typically starts at approximately 3.1 percent of the vehicle’s value.

If you have a third-party cover and do not have the cash to buy a comprehensive cover, most lenders will provide an Insurance Premium Financing (IPF) loan. This amount is added to the loan principal to be repaid over the loan tenure increasing your total interest expense. 

Additional fees not common across all logbook loan lenders may include legal fees, CRB charges, application fees, membership fees and bank disbursement fees. 

Processing fee

After collateral perfection is complete, the last fee to be charged just before disbursement is the loan processing fee. 

According to Money254.co.ke Insights, this typically ranges between two percent and seven percent of the loan amount although some lenders charge a fixed amount instead of a percentage. 

How the processing fee is calculated could increase or lower your loan costs depending on the size of your loan. 

“If you borrow Sh200,000 with a 2.5 percent processing fee, that would be Sh5,000 which is lower than the lowest fixed fee of Sh13,000. However, if you borrow higher amounts, say Sh1 million with the same 2.5 percent processing fee, Sh25,000 is higher than the given fixed fee example of Sh13,000,” explains Money254’s Relationship Manager, Doreen Nkirote. 

Late fees and default

In the event of default, logbook lenders are authorised as per the loan agreement, to take necessary measures to recover the outstanding balance. This may include repossessing and selling your vehicle.

However, it's important to note that most lenders would prefer to work out a payment plan with you rather than go through the hassle of repossession and disposal. 

"If you find yourself struggling to make payments, it is crucial to contact the lender promptly - ideally before falling into default. There may be some concessions you can get including being offered a grace period or allowing you to pay only the interest until you can resume repaying the principal amount," Nkirote advises.

If you fall into default, it may take between one and three months for microfinance lenders to repossess your vehicle. 

In the intervening period as you try to regularise your loan account, late fees - which vary widely but are generally expressed as a percentage of the owed instalment amount - will apply. 

It is important to note that lenders will start charging the late penalty on the due instalment amount one day after the due date. Late fees are typically added to the loan amount. 

What if you reach a point where you can fully repay the loan ahead of time or have found a new lender with good refinancing terms? 

Early repayment - paying off a loan before its scheduled term - can bring benefits like reducing overall interest, improving your credit score, and providing financial flexibility. Nevertheless, early repayment may incur fees depending on the lender. 

Lenders have varying policies: some allow early repayment without penalties, some charge a fixed penalty, others calculate a percentage of remaining interest as a penalty, and some don't allow early repayment and demand the full interest amount regardless of when you clear the loan.

Interest structure

Your logbook loan will either have a flat rate or a reduced balance interest structure. 

The flat interest rate is calculated based on the entire loan amount throughout its tenure, without considering the gradual reduction of the principal through equated monthly instalments (EMIs). Consequently, the Effective Interest Rate ends up significantly higher than the initial Flat Rate quoted. 

Conversely, reducing balance is computed on the outstanding loan balance. As each repayment instalment is made, the outstanding amount decreases, resulting in interest being charged only on the due loan balance. 

How logbook loan fees are treated

Given the significance of loan fees on the total cost of credit, there are three ways in which these fees are processed.

The most straightforward option is to pay in cash from your pocket before the loan can be disbursed. This allows you to receive the exact take-home amount you had applied for and the total interest payable stays unaffected. 

The deduction of the fees from the loan amount is the second option. Here, instead of paying from your pocket, the lender subtracts the applicable fees from the loan before disbursement. You receive a lesser take-home amount than you had applied for but you will still pay the full interest as if you received the full amount. 

Alternatively, logbook loan fees can be capitalised. This means that the fees are added to the principal loan amount and become part of the total debt. As a result, the borrower is effectively borrowing more money, including the fees, and will need to repay the higher loan amount, which also incurs additional interest charges over the loan term. 

“Understanding logbook loan fees, their breadth, their effect on total loan cost and how they are treated is very crucial - over and beyond the marketed interest rate. You are in a much better position to choose the most cost-effective loan product and repayment plan,” urges Ng’ang’a. 

If you are considering a logbook loan, you can compare your options on Money254.co.ke for free.