What are Logbook Loans?

Logbook Loans are acquired when you apply for a loan and leverage your car as collateral. In some cases, it’s even feasible to utilize multiple logbook loans to secure a single loan facility.

Why are logbook loans becoming so popular?

Logbook loans are rapidly gaining prominence as one of the fastest-growing loan categories in Kenya, driven by two primary factors: speed and convenience. Many logbook loans can be processed within 48 hours or even less. Moreover, the only essential requirement for such loans is a logbook and not much else. Consequently, many car owners discover that obtaining a logbook loan is among the most straightforward options when facing financial constraints.

However, it is crucial to recognize that logbook loans are not as uncomplicated as they may initially appear. In other words, not all logbook loans share the same characteristics on the surface. As a borrower, exercising caution is essential when choosing a logbook loan provider and determining the reasons behind your choice.

What is the process of securing a logbook loan?

Identify a suitable lender

When someone expresses interest in a logbook loan, the initial step involves identifying the preferred provider from among the growing number of logbook loan options in Kenya. The prospective borrower faces the challenge of sifting through these options to settle on their chosen provider. Many of these providers commonly make similar promises, emphasizing quick turnaround times and affordable interest rates, understanding that these factors resonate with most borrowers. However, it’s crucial to recognize that logbook loans entail more than just the speed of processing and generic affordability in interest rates.

In reality, there are nuanced aspects to logbook loans beyond turnaround time, and the term ‘affordable’ in interest rates encompasses various considerations. This underscores the significance of the decision-making process in selecting a lender, as it plays a pivotal role in the entire loan application procedure.

Share details of the vehicle

Once the logbook loan provider is identified, the prospective borrower initiates contact with the lender, either through a phone call or by filling out an online form. Subsequently, the borrower provides details about their vehicle, emphasizing key information such as the year of manufacture, make, and model. These details are of paramount interest to lenders at this stage, as they help determine the eligibility of the vehicle for the loan. Some lenders may have specific age requirements for vehicles, as age strongly influences the car’s appraised value.

This introduces the second crucial aspect of the process: car valuation. The lender assesses the value of the vehicle, considering various factors such as its age, condition, make, and model. The outcome of this valuation significantly influences the loan amount that the borrower may qualify for. Therefore, both the eligibility assessment and the subsequent valuation stage play integral roles in shaping the logbook loan application process.

Car valuation

As previously mentioned, the logbook loan lender representative will automatically inform you if your car qualifies for the next stage – the valuation process. Valuation is the method of determining the monetary value of an asset at a specific time and for a designated purpose, conducted by a professional known as a valuer. If your car needs to be valued, you will be directed to take it to a valuation expert.

Typically, logbook loan lenders maintain their panel of valuers. Since this service is provided by a third party, you may be required to pay a small fee for the car valuation. Valuers assess various aspects of the car, including its model, age, resale value, and current condition. These factors are crucial in ensuring an accurate and fair valuation. For instance, two cars of the same value might qualify for different loan amounts if one has a better resale value due to its model.

In the context of the Kenyan market, Toyota cars are widely popular. They are affordable to purchase and tend to retain their value over time, depreciating at a slower rate. Consequently, many logbook loan lenders prefer dealing with Toyota cars as the preferred collateral and may offer higher loan values as a percentage of the vehicle’s worth.

On the contrary, European luxury car brands are expensive when new but tend to depreciate rapidly in the Kenyan market. This is often attributed to the perception that they are costly to maintain over time, leading many individuals to avoid purchasing older luxury car models. Even if the value of a Mercedes Benz or BMW is equivalent to that of a Toyota, lenders may favor the Toyota due to its better market offloading potential in case of repossession.

Efficient logbook loan lenders streamline the car valuation process, often completing it in a relatively short time. Many have pre-approved valuers ready, allowing them to finalize the process in as little as 30 minutes to 1 hour.

Share additional details

Having determined the value of the car, the logbook loan lender will proceed to gather additional details from the borrower. Primarily, they may request your bank statements and Mpesa statements, and also check your Credit Reference Bureau (CRB) rating. These statements play a crucial role in assessing your ability to repay the loan.

Bank statements provide insights into your financial transactions and stability, helping the lender evaluate your income, expenses, and overall financial health. Mpesa statements, which detail mobile money transactions, offer further visibility into your financial activities. This comprehensive financial snapshot aids the lender in understanding your repayment capacity.

The CRB rating, on the other hand, provides the lender with valuable information about your credit history and loan repayment behavior. It reflects your creditworthiness and serves as an indicator of your reliability in meeting financial obligations. A positive CRB rating enhances your credibility as a borrower, while a negative rating may raise concerns for the lender.

Collectively, these details enable the logbook loan lender to make an informed decision about the loan approval and terms. By assessing your financial statements and CRB rating, the lender gains valuable insights into your financial responsibility and repayment capability, contributing to a more comprehensive evaluation of your loan application.

Lending with a negative credit history

Despite a negative credit history, many logbook lenders are willing to provide financing, which sets them apart from mainstream lenders that might be more stringent. However, due to the perceived higher risk associated with a negative credit history, borrowers in this situation may qualify for a lower loan value, and the lender might impose a slightly higher interest rate to mitigate the associated risks.

In contrast to traditional lenders who may be unwilling to entertain loan applications from individuals with poor credit, logbook lenders are often more open to considering such cases. While the terms may be adjusted to accommodate the higher risk, the willingness to provide financing can be a lifeline for borrowers facing credit challenges. This flexibility is a distinguishing feature of logbook loans, making them accessible to individuals who might otherwise struggle to secure financial assistance from more conventional lending institutions.

Check how much the client wants vs how much they qualify for

Once all the necessary details have been accurately provided, the logbook loan lender possesses the information needed to evaluate your loan request with the amount you qualify for. For example, if you own a Toyota car, a 2014 model with a valuation of Kshs 1,000,000, and you have a reasonably good credit history, a lender may be willing to grant you up to 70% of the car’s value as a loan, which amounts to a Kes 700,000 loan.

This implies that if you are seeking a logbook loan of a lesser amount, say Kes 500,000, you fall within the qualifying range based on the vehicle’s value and the lender’s assessment. The loan amount is often determined by a percentage of the car’s appraised value, and the final decision takes into account factors such as your credit history and other relevant details. Understanding this qualifying window allows borrowers to align their loan requests with the lender’s criteria and make informed decisions about the loan amount they are seeking.

Determine the interest rate

Determining the interest rate on a logbook loan is a crucial step after the loan amount is approved. There are two primary types of interest rates: reducing interest rates and flat interest rates. While flat interest rates may seem lower at face value, they can be deceptive in their cost structure.

Flat interest rates are typically charged on the total amount of the logbook loan and calculated for the entire loan tenure. For instance, if you are charged a flat interest rate of 1% per month over one year, the total interest becomes 1% x 12, which is 12% of the total loan amount. Over two years, for a loan amount of, say, 100,000, each year would accrue an interest of 12,000, resulting in a total interest payment of 24,000.

In contrast, reducing interest rates, also known as reducing balance interest rates, are calculated monthly on the outstanding amount. This means that if you make additional payments or prepay, you reduce the principal and automatically decrease your interest payments significantly.

Even without prepayments, assuming you borrow 100,000 over two years and plan to repay a total of 50,000 each year at a 12% per year reducing interest rate, the interest for the first year would be 12% of 100,000, which is 12,000. In the second year, the interest would be 12% of the remaining balance of 50,000, which is 6,000. Therefore, the total interest would be 18,000. When compared point for point, the reducing rate is significantly cheaper.

Most lenders adjust and may add a higher margin on reducing interest rates to balance their returns. When applying for a logbook loan, it’s crucial to use calculators or online tools to understand the cost implications fully. Don’t assume that a reducing rate is always less expensive; take the time to calculate and confirm the actual costs involved. This proactive approach ensures that borrowers have a clear understanding of the interest structure and can make informed decisions based on their financial considerations.

Signing loan terms and the disbursement process

After determining the interest rate, there will be additional terms that constitute the overall loan terms. Together, these terms will form the loan offer the lender presents for your approval and signature. When you are ready to finalize the agreement, you will need a witness to execute the contract, and a lawyer may also be involved to ensure the legal execution of the offer.

Once the loan offer is signed and all necessary legal procedures are completed, the disbursement process can begin. The loan amount is typically disbursed within a few hours, and the funds may be transferred through Real Time Gross Settlement (RTGS) or issued as a physical cheque. Some lenders may provide physical cheques that can be cashed at the counter.

The entire process, from the initial application to the disbursal of funds, can take anywhere from one to two days. The efficiency of the process may vary among lenders, but the goal is to streamline the steps involved to ensure a swift and hassle-free experience for the borrower. It’s important for borrowers to carefully review the loan offer, understand the terms, and seek legal advice if needed before finalizing the agreement.

Is someone promising a logbook loan in 2-6 hours? That’s highly unlikely

Your caution regarding lenders promising an extremely rapid logbook loan disbursement, such as within 2-6 hours, is valid. Proper due diligence is a crucial step in the lending process, and rushing it within such a short timeframe might compromise the thorough assessment required for responsible lending.

In many cases, lenders claiming to provide loans for such a short duration may be making assumptions about the borrower’s risk profile, and this can result in higher interest rates. A slight delay in the process is often essential to ensure that the lender has sufficient time to gather and analyze the necessary data, enabling them to make an informed decision. This, in turn, allows them to offer the borrower the best available deal, considering factors such as the loan amount, interest rate, and other terms.

While speed is undoubtedly important, it should not come at the expense of proper evaluation and the borrower’s long-term financial well-being. Being patient during the process can lead to a more favorable loan offer and potentially save a significant amount on interest payments throughout the loan. Borrowers need to prioritize the overall terms and conditions of the loan rather than opting for a hasty approval process that might result in less favorable terms.

Caveat Emptor- the devil is in the details

Indeed, “Caveat Emptor” is a Latin phrase that translates to “Let the Buyer Beware.” This principle is particularly relevant, especially when it comes to signing logbook loan agreements. As a borrower, it’s crucial to recognize that the true risks in a loan may not be immediately apparent but rather concealed within the fine print. When signing the dotted line, it’s essential to pay attention to the details that may not be immediately obvious.

Hidden fees, undisclosed terms, or complex clauses can significantly impact the overall cost and conditions of the loan. Borrowers should be diligent in reviewing every aspect of the agreement and, if needed, seek legal advice to ensure a comprehensive understanding of the terms. This proactive approach empowers borrowers to make informed decisions, mitigating the risks associated with any potential hidden details in the logbook loan agreement. Awareness and caution during the agreement-signing process align with the principle of “Caveat Emptor,” emphasizing the importance of buyer awareness and responsibility.

Penalties for early payment/ ease of buy-off

Borrowers need to be aware of the terms and conditions related to prepaying a logbook loan. While lenders may be cautious about allowing early repayments due to their interest projections and budgeting considerations, borrowers have the right to terminate the loan contract, adhering to the stipulated provisions. However, it’s common for lenders to charge a penalty for pre-mature loan payments, and this charge should be reasonable.

The type of interest rate initially chosen becomes crucial during prepayment. Loans with reducing balance interest rates are often more flexible and cost-effective to walk away from compared to flat-rate contracts. Therefore, selecting a provider who considers these factors from the beginning is essential.

Red flags such as difficulty in obtaining loan statements, unreasonable charges for statements, or restrictions on the validity period of statements should be taken seriously. These might indicate that the lender is attempting to discourage borrowers from leaving. Seeking clarification on these matters, preferably before signing the contract, is crucial.

While the need for loan approval might create a sense of urgency, borrowers need to be prepared to walk away from a contract that could lead to a worse situation. Logbook loans are designed to assist, not to add to the borrower’s financial challenges. Being vigilant and making informed decisions ensures that the loan serves its intended purpose without becoming an additional burden for the borrower.

The overall cost of the loan

Taking a logbook loan, like any other loan, involves considering various processing costs associated with the loan. These costs encompass marketing (the expense of making borrowers aware of the loan provider), legal fees (for executing contracts), valuation costs (to determine the vehicle’s loan guarantee), tracking expenses (for vehicle monitoring, often provided by a third party), and insurance charges (to cover unforeseen circumstances such as borrower disability or death).

While these charges are reasonable, the significant difference lies in the amounts levied by different lenders. Some lenders add these costs to the loan amount, others deduct them, and some may require upfront payment. It is essential that regardless of the chosen option, the overall cost of the loan remains fair and reasonable. Borrowers should factor these costs into their calculations along with the interest rate to determine the total cost of the loan and assess its financial viability.

Negotiation is a powerful tool in dealing with these costs. Borrowers should be proactive in discussing and negotiating terms with the lender. Terms are not always rigid, and many lenders are open to reasonable negotiations. Communicating reasons for specific alterations in terms and negotiating can result in a loan agreement that better suits the borrower’s financial situation. Remember, being well-informed and assertive during negotiations can contribute to a more favorable overall loan package.

Ability to restructure

The Covid-19 pandemic indeed had a profound impact on people’s earning capacity, leading many to face financial challenges. As individuals sought assistance from their financing partners, some were surprised to find that their loan contracts did not have provisions for restructuring in times of crisis. This lack of flexibility left many in distress.

The experience during the pandemic underscored the importance of discussing restructuring components as an integral part of loan contracts. It is advisable to negotiate these possibilities before they become necessary, especially when borrowers are not desperate and haven’t fallen into default. Initiating such discussions before signing any dotted line provides borrowers with a more favorable position and leverage.

Remember, the negotiation phase before signing the contract is the best time to address potential challenges and uncertainties. By doing so proactively, borrowers can ensure that their loan agreements have provisions for unforeseen events, offering them more flexibility and protection in times of financial hardship or crises like the one brought about by the COVID-19 pandemic. It’s a valuable lesson to consider the resilience and adaptability of loan contracts, anticipating and addressing potential challenges before they arise.

Pre-paid cheques

Signing prepaid cheques as part of a logbook loan agreement is a common practice, but borrowers need to be vigilant to avoid potential issues. Some lenders may not deposit these cheques promptly, leading to concerns about default on the borrower’s account.

To mitigate this risk, borrowers are advised to seek assurances from the lender regarding the timely processing of the prepaid cheques. Alternatively, they can take the initiative to follow up with their relationship person or point of contact at the lending institution regularly. This proactive approach ensures that borrowers are aware of when the cheques will be deposited and can manage their finances accordingly.

Additionally, it’s crucial to stay in communication with your bank to avoid potential issues such as a bounced cheque due to insufficient funds. A bounced cheque can result in penalties both from your bank and the logbook loan lender, leading to additional financial burdens. Regularly monitoring your account, ensuring sufficient funds, and maintaining open communication with both your lender and your bank can help prevent such complications and ensure a smoother loan repayment process.

Tracking & Insurance 

Qualifying for a logbook loan typically involves having your car tracked by a chosen panel person from the logbook lender. When it comes to tracking, borrowers are often given two options: paying a periodic tracking fee or purchasing their own tracking device outright. If both options are available, buying the tracking device outright may be more cost-effective in the long term. However, if only one option is provided, negotiating a rental fee that aligns with your budget and having it added to your monthly loan repayments is a viable approach.

A similar choice is often presented for insurance. Borrowers can opt for Insurance Premium Financing as an additional aspect of their loan from the same logbook loan financier. While this can provide added convenience, it will increase the monthly loan installment significantly. If you are in a position to manage your insurance independently, doing so can offer long-term relief and potentially save on overall costs.

In both cases, whether for tracking or insurance, exploring and understanding the options available to you, and negotiating terms that suit your financial circumstances, is crucial. Making informed decisions about these additional aspects can contribute to a more manageable and cost-effective logbook loan experience.

Knowledge is power, the above article offers an insight into the intricate world of logbook loans. There are many reliable logbook financiers in Kenya that offer reliable services. Check them out and compare them to make an informed decision. Good luck!