Financial emergencies are part and parcel of life. While there are many ways to address them, they can be complicated when you don't have a rainy day fund or quickly run out of it. When this happens, your other options usually involve liquidating your assets or taking out an emergency loan.
Liquidating an asset can be a lengthy process. In most cases, you can struggle to find a ready buyer and are forced to sell at a distressed price below market value. If you are not prepared to stomach the loss, your next option is to take an emergency loan.
Emergency loans are a type of loan product used to finance unexpected expenses. They can be used to cover everything from personal emergencies like medical bills to business emergencies like fixing cash flow problems.
There are different types of emergency loans in Kenya. Some common ones include digital loans, shylock loans, and loans from loved ones. But one type of loan that Kenyans prefer during emergencies is logbook loans.
A logbook loan is a type of secured loan that uses your automobile, van, tractor, or motorcycle as collateral. It allows you to borrow a predetermined sum from the lender against the value of your vehicle. Until you repay the loan, the car is put on temporary joint ownership with the financer.
This article will explore six reasons why Kenyans prefer logbook loans over other types of emergency loans.
Granted, you have a vehicle, and it is in your name; you can easily access a logbook loan. An array of features makes this possible and a go-to loan for Kenyans during emergencies. First, there are various lenders to choose from. Many microfinance and credit institutions will offer you this type of loan if you meet their eligibility criteria.
Second, you can start your application online and get a quote. Unlike other types of loans, you don’t have to go through multiple meetings before being approved. Once you make your application, they will usually contact you and direct you to their nearest office. They will appraise your vehicle, check your creditworthiness, and initiate financier-individual joint ownership.
Finally, your loan will be disbursed once you finish all the processes. Most lender promise approval and disbursement within 24 hours, depending on how much you want and how quickly the process is. The disbursement period is typically faster than loans from commercial banks and other unsecured debts.
To fasten the process, ensure you have your paperwork in order and research a lender well before contacting them. Additionally, ensure you meet a lender's minimum requirements before applying.
Most loans have restrictions dictating how borrowers use the funds. For instance, construction loans limit borrowers, allowing them to use the loan only for constructing a specified building. A HELB loan to students enables them to use the money to pay for their tuition, accommodation, and living expenses. Likewise, a business loan is used for a specified business.
Logbook loans are different. You can use the funds you receive to facilitate any financial obligations you have. This type of freedom is important when you have an emergency, or you are in a financial fix that might scare away traditional lenders. For instance, if you risk defaulting on an existing loan because of liquidity problems, you can take a quick logbook loan. Other lenders will usually need to know how you will spend the loan and will be hesitant to offer you a loan to repay another debt.
Logbook lenders afford to be lenient towards borrowers because they take temporary joint ownership of your vehicle. This reduces the financier’s expectations of your capacity to repay the loan. This allows you to borrow the money quickly and use it to facilitate various financial demands as desired without the lender’s oversight. And if you default, they can repossess your vehicle and auction it off to recover their money.
However, Logbook lenders aren’t going to lend you blindly. You will still need to prove your ability to repay the loan in time.
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Logbook lenders will usually appraise your vehicle, determine it is Forced-Sale Value (FSV) and use that to establish how much you qualify for outright. This means you can borrow a lot of money without a previous credit history with the institution.
A vehicle’s forced sale value is the amount of cash the lender will get for the vehicle in an immediate auction or short duration in case you default on the loan and your car is put on the market. This means that your car will usually receive a low valuation. Once the value of your car is determined, most lenders will allow you to borrow 50-80% of the FSV.
If your vehicle FSV is Ksh600,000, you can borrow up to Ksh480,000 outright.
This feature makes logbook loans ideal during emergencies if you don't have a credit history. Consider other emergency loan providers like mobile and digital lenders. Before they can lend you money, you must build up your limit, which can take months or years.
Let's say you have a medical emergency that requires Ksh50,000, and you have never borrowed money before. You can go to your bank or Sacco, but their process is typically lengthy and complicated. You download a digital lending app, but the limit for new customers is Ksh1,000 or less. But if you have a logbook, you can walk into any lender and borrow Ksh50,000 within 24 hours. Granted that your vehicle FSV is at least Ksh63,000.
Most logbook lenders will consider your low creditworthiness if you meet other eligibility criteria. They might ask for a CRB certificate or run their independent credit search during the application process. The application will typically be smooth if you have a clean credit history.
If your credit history isn't that stellar, lenders will consider your application depending on multiple factors. For instance, if you have a history of default, they might look at the amount and ask why you defaulted. They might be willing to overlook the bad credit if you have good reasons.
Consider two people, for instance:
Person A: He has bad credit because he defaulted once after taking a Ksh1k loan on mobile lenders and forgot. Such a person might be considered during emergencies.
Person B: He has bad credit because he defaulters personal loan of Ksh100,000 from a bank. Such a person is less likely to be offered a loan.
As a precautionary measure when applying for a logbook loan, get a CRB certificate to ensure you can qualify for a loan. If you have bad credit, let the lender know before you start the process. This will prevent you from paying the application and other non-refundable fees for you to be denied a loan.
If you have a history of defaulting, logbook lenders might offer you less money than someone with a clean record. Additionally, given that they will be taking a risk with you, your loan might attract higher fees, interest, and stricter terms.
Most loans will usually require that you have a consigner when applying. For instance, loans provided by Saccos require borrowers to have a guarantor if they are borrowing more than their deposit. And the same goes for title deed loans which require married people to co-sign with their spouse if the land is matrimonial property.
Logbook loans have an advantage since they don’t require borrowers to have cosigners. They are a better alternative because of the ease of the application process, allowing sole-owner to access their funds quickly without cosigning with their spouse or other individuals, as with shared properties.
However, lenders will require a co-signer if one or more people jointly own the vehicle. Other owners will have to sign off on the vehicle allowing the financier to take in-charge ownership.
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Most emergency lenders, like digital loan apps, require borrowers to repay a loan within 30 days. However, this can be problematic if the borrower doesn’t have enough time to repay the loan within the stipulated period.
Logbook loans can be a better alternative if you can't repay your loan within a month. Lenders will usually offer flexible repayment terms of one to 60 months. However, the lender will decide the repayment interval, which generally ranges from weekly to monthly. Ensure you bargain and pick one that can work depending on your financial situation.
While repayment terms might be flexible, you should look at other loan conditions. For instance, some lenders will typically penalize you for repaying a loan earlier than stipulated in your terms. Others have minimum repayment terms, which might not work for you if you want to repay a loan in three months, but the lender's minimum term is six months.
While the process of acquiring logbook loans can be easy, you should do it carefully. First, shop around and compare different lenders to ensure you get the best deal. Second, don't accept any loan without reading the terms and conditions. And finally, take loans you can afford to repay. If you default on a logbook loan, you risk losing your vehicle.
Remember that logbook loans and any other emergency loans are only temporary fixes, and you can't rely on them forever. They're expensive and can expose you to more financial troubles that lead to financial instability.
Consider adopting strategies that will help you reduce your dependency on them. This includes building robust rainy-day funds and maintaining liquidity by diversifying your investments.