Banks have opposed a petition seeking to compel them to obtain court orders before selling off any property charged as security for loans. PHOTO | SHUTTERSTOCK
This is the second article in an ongoing series on logbook loans in Kenya. Click here to read the first article.
Logbook loans are an easy way to quickly access large amounts of money, especially during financial emergencies, to fund high-priority business opportunities and other urgent cash needs.
Their ease of accessibility, quick approval and disbursement, and flexible payment terms have made them popular among Kenyans looking for quick credit.
These advantages are typically associated with logbook loans offered by non-deposit-taking microfinance institutions (MFIs) that are currently not regulated by the Central Bank of Kenya (CBK) or any other financial services regulator.
As such, when compared to secured lending products offered by regulated financial institutions, MFI logbook loans can be somewhat confusing.
Owners of small and medium enterprises (SMEs), who form a big chunk of the target market in this loan category, may find the speed and ease of access beneficial.
But they also have to contend with significantly higher costs as well as the need to carefully weigh the risk of losing ownership of their vehicles. According to insights from Money254.co.ke - a financial marketplace - average logbook loan APRs (annual costs of a loan to a borrower) for MFIs stand at 60 percent, as compared to about 17 percent for banks.
That is why understanding the process of getting an MFI logbook loan is critical before putting your personal or business assets on the line.
Step 1: Preparation
Before approaching a lender, the first step is to carefully evaluate your reasons for borrowing. For example, is clearing school fees arrears a good enough reason to put your business van on the line? How about a large medical bill or a need to invest in your business growth by opening a new branch or new product line?
After establishing how much you need to borrow, make a personal estimation of your vehicle’s Forced Sale Value (FSV) - that is, the amount your car can fetch when sold within a short time frame.
“The FSV of your vehicle may be up to 25 percent lower than its market value with MFI lenders in Kenya. This affects the actual amount you can borrow and knowing this prior can help you better manage expectations,” says Money254 Commercial Analyst, Hilda Ng’ang’a.
MFIs usually offer loan amounts of between 50 percent and 80 percent of your vehicle’s FSV, so you can use this to estimate the loan amount accessible to you.
You also need to determine whether your chosen lender can underwrite your car. This depends on your vehicle’s make, model, and year of manufacture. You can find out whether your car qualifies by contacting the lender or using a logbook loan marketplace such as Money254.co.ke.
Step 2: Affordability assessment
Next, you visit or contact the lender you are interested in where an assessment of your ability to repay and the suitability of your collateral will be determined.
Apart from basic KYCs, you will need to provide income documents such as your payslip if you are employed, and bank and/or M-Pesa statements. A copy of your logbook will be needed to search NTSA TIMS. You may need to pay for the search fee off-pocket.
Once the lender determines your eligibility, they’ll then need to perform a vehicle valuation. This can be done at the branch or any convenient location, including your home.
Some lenders require you to pay for valuation upfront, while others cover the cost which ranges between Sh2,000 and Sh5,000.
Step 3: Loan offer
If you qualify for the loan, the lender will issue you with a loan offer letter which is based on your income, vehicle value and the amount you were looking for. This outlines the loan terms, including the amount, interest rate, repayment terms, and repayment schedule.
At this point, it is possible to negotiate if you’re not happy with the terms. For example, you can ask for a longer repayment period, lower interest rate, waiver of a fee or flexible repayment terms such as penalty-free early repayment.
You should only accept and sign the loan offer letter if you’re fully satisfied with the loan terms. You may also want to have your lawyer review the loan terms before you sign.
Step 4: Closing
If you accept the offer, you will need to present your vehicle for car tracker installation. You will either be charged a one-off car tracker fee typically between Sh4,000 and Sh7,500 or a monthly fee typically between Sh1,700 and Ksh2,000 per month depending on the lender.
Next, the logbook will need to be changed via NTSA TIMS to reflect joint ownership between you and the lender for the duration of the loan (in charge).
This prevents you from selling it until you clear the loan and allows the lender to sell the vehicle if you default. You may need to cover the in-charge fee from your pocket.
Besides the valuation and in-charge fees, most lenders also charge a loan processing fee of between two percent and seven percent of the loan amount.
Some lenders will require you to pay for upfront fees, other than the processing fee, off-pocket before disbursing the loan. Others deduct upfront fees from the loan amount before disbursement meaning you get a lower take-home amount. Others give you the option of adding these fees to the principal amount (capitalisation) which increases the total interest payable but allows you to get the exact amount you applied for.
“Capitalisation of fees is a fairly common practice with logbook loan lenders and is especially beneficial for borrowers keen on receiving the exact take-home amount they need. Many SMEs taking logbook loans to finance critical business transactions would rather receive the exact amount they are looking for and pay the marginally higher total cost of credit due to the increased principal,” says the Money254.co.ke Commercial Analyst.
Depending on your lender, you may also be required to provide post-dated cheques for each month of the loan tenure. For example, for a 20-month loan, you’ll provide 20 post-dated cheques. The lender will simply be cashing each cheque as it comes due.
Once the in-charge process is complete and the joint ownership is updated on the logbook, the lender then disburses the loan amount, either by cheque or bank transfer.
Step 5: Loan servicing and discharge
After receiving the loan, all you need to do is pay the loan according to the terms agreed on in the offer letter.
Once you’ve fully repaid the loan, the lender will discharge the lien on your vehicle, and your logbook will be updated to reflect your sole ownership. Discharging the loan costs about Sh3,000, which you’ll be required to pay.
Early repayment and default
One important factor to consider when choosing a logbook loan provider is the early repayment policy. The ideal is a lender that allows you to clear your loan before the full term expires and save on the interest you would have paid were you to keep the loan for the full tenure.
While many lenders allow early repayment without any penalties, others will charge a standard fee while others will charge a penalty as a percentage of the remaining interest.
Another subset of lenders do not allow early repayment meaning even if you pay early, you have to pay the full interest amount you’d have paid over the entire loan term.
Understanding how a lender treats early repayment helps you evaluate the potential benefits of clearing the loan early. It enables you to determine the most cost-effective strategy for paying off the loan.
Sometimes, due to financial difficulties, you might be unable to make timely repayments as agreed on with your lender. This can result in steep penalties, so you should try as much as possible to pay on time. Late fees vary significantly across MFIs but are usually a percentage of the owed instalment amount.
If you default on consecutive payments, the lender has the right to possess your vehicle. The timelines for possession vary between lenders, but generally, repossession may occur within one to three months of default.
“To avoid the consequences of a default, you should ensure you inform the lender about your situation if you feel you won’t be able to make payments on time. Do this before you actually default and you may get some accommodation,” advises Doreen Nkirote, the relationship manager at Money254.co.ke.
Communicating in advance allows you to negotiate alternative payment arrangements, such as being allowed to make partial payments without incurring late fees. Some lenders also offer restructuring options where they modify the loan terms to make repayment more manageable.
You can also refinance the loan, which means replacing the existing loan with a new one from a different lender with better terms. The new lender essentially buys off the initial loan leaving you to service the new one that may have a longer tenure and lower monthly repayments.
If you opt to refinance your logbook loan, you can use Money254.co.ke to compare options including discovering new lenders who are gradually entering the logbook loans market.
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