Few Kenyans have the cash they need at hand to pay for big-ticket expenses upfront. As such, it is not unusual to see people looking for loan options to meet these needs.
If it is not a big household purchase, it may be the need to stock up for an upcoming season, a medical or other emergency, the need to quickly take advantage of a time-limited money-making opportunity, or urgent bills such as school fees.
A logbook loan is one such option that many Kenyans are choosing for various reasons, the biggest being the incredibly fast disbursement speeds and the fact you can get large amounts even when you have a less-than-perfect credit history.
While many Kenyans, especially those who own SMEs, have embraced logbook loans as one of their go-to credit options, logbook loans are generally misunderstood, if not feared.
Indeed, there is a real risk of losing ownership of your vehicle since it is used as collateral and you have to enter into a joint ownership of the vehicle before the funds can be disbursed to you.
That is why understanding how logbook loans work and what to look out for when shopping for one is of utmost importance. You want to find the logbook loan that best suits your very unique circumstances.
Why are so Many Kenyans Taking Logbook Loans?
Some of the major reasons that Kenyans give for taking logbook loans in Kenya include
- To fund quick investment opportunities - when you have a money-making opportunity but do not have the working capital to fund it. A logbook loan is seen as a good option due to the speed, high amounts and the fact that with most you can repay early and save on the interest.
- To start or expand business - Using logbook loan money to either kickstart a new business or expand into a new location or new product line. Given the high amounts one can qualify for (depending on the value of the car), a logbook loan can be used to raise startup capital - this especially for borrowers with either not-so-good credit, a non-existing credit history or generally anyone facing challenges getting the amounts they need from traditional financial institutions.
- Emergencies - whether medical, bill or business-related, one of the biggest selling points for logbook loans is the incredibly fast turnaround time. You can get your loan disbursed as quickly as within 6 hours of making your application provided that all your documentation is in order - depending on the lender.
- Cash Injection For Stalled Projects - For example, suppose you are building your dream home and the expenses go above the budget before completion. In such a case, a logbook loan can be a solution. You can use your vehicle as collateral to acquire funds to complete the project, and then pay back the funds later on.
- School Fees - at the beginning of every back-to-school season, we see a spike in logbook loan applications. Typically, borrowers have been caught in a cash crunch and as you know, you can’t postpone back-to-school. Instead of taking a short-term emergency loan (30 days), logbook loans can be an option for someone thinking of keeping the loan for a little longer as they reorganise their finances.
- When Moving or Relocating - Moving expenses, especially when the move is abrupt and necessary, can rack up pretty fast. A logbook loan is one option to raise the funds necessary to move and pay back later in instalments.
- A Major Life Change - whether it is a wedding, divorce, the unfortunate case of the death of a loved one, the arrival of a baby and other significant life changes, often the financial implications of the change may necessitate the need to borrow. A logbook loan is one of the options available to fund these unavoidable expenses.
Read in Detail: Why are So Many Kenyans Taking Logbook Loans?
6 Reasons Why Kenyans Prefer Logbook Loans During Emergencies
Emergencies - including medical, emergency bills, travel, occupational or business-related - are some of the common reasons that Kenyans give for taking logbook loans. Speed and high amounts being a big selling point for this product during emergencies.
Some of the main reasons that make logbook loans attractive during financial emergencies include;
- Logbook Loans are Easily Accessible - Granted you have a vehicle, and its logbook is in your name; you can easily access a logbook loan. There are multiple lenders, they consider bad credit and offer some of the fastest secured loan processing times.
- No Restrictions on How you Use the Loan - 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 make you less attractive to traditional lenders.
- You Can Borrow as Much as You Qualify For - Once the Forced Sale Value of your vehicle is established, you can borrow between 50% to 80% of this value as a logbook loan. This feature makes logbook loans ideal during emergencies if you don't have a credit history since you can borrow a considerable amount within 24 hours without ever having a prior existing relationship with the lender.
- No-cosigner Required - Many secured loans will usually require that you have a cosigner when applying - this is especially when you are looking for fairly larger amounts. 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 shorten this process by only requiring a verification of ownership of the collateral (your car). During an emergency, it is typically the fastest route to financing that wins.
- Longer Tenures - Most emergency loans, including 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. MFI lenders will usually offer flexible repayment tenure of up to 60 months.
- Bad Credit is Considered - If your credit history isn't that stellar, MFI 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 history if you have good reasons.
Read in Detail: 6 Reasons Why Kenyans Prefer Logbook Loans During Emergencies
When Does Taking a Logbook Loan Make Sense?
Now, back to the real risk of losing your car. If most people could avoid it, they would not put their cars, or any other eligible collateral such as land, at risk. But often, there are circumstances that one finds themselves in when taking a logbook loan is actually a good decision. We discuss a few below;
- When You Already Have An Existing Loan and Need Quick Cash - due to their speed and flexibility, MFI logbook loan lenders may be a good option when you need quick cash but you already have an existing loan with your regular lender. This may be due to process challenges with traditional lenders that may require you to either borrow enough to clear the existing loan to take a new one (top-up) which may impact speed - especially when you are using these funds to fund a money-making opportunity e.g. stocking up for back to school.
- When You Need Cash Fast and in Large Amounts - Again MFI logbook loan lenders stand out as a good option for borrowers requiring large amounts of cash fast. With processing speeds of as fast as 6 hours, many SME owners may find this quite beneficial as compared to traditional lenders who may take a few days spending on whether you have an existing relationship with them and up to a few months if you have no existing relationship.
- When You Need Cash But Have Poor Credit - with your car as collateral, MFIs do not really require you to have a perfect credit history to qualify for a logbook loan. All they need to establish is your ability to repay and you can qualify for a loan when you had a little chance of qualifying with a traditional lender.
- When You Need a Loan But Have No Credit History - there's having a poor credit history (having defaulted on some loans, not borrowed enough etc.) and no credit history (a first time borrower) which also impacts your ability to qualify - especially for a bigger loan amount - with traditional lenders. You may need to take smaller loans and grow your limits. With MFI logbook loan lenders, you do not need a credit history to qualify.
- When You Have an Emergency Expense and No Other Financing Options - As earlier discussed, one of the most common use cases for logbook loans is emergencies. They might be personal or business related and need handling now. If you can’t raise the funds needed from friends and family and traditional lenders are not fast enough or are not an option because you do not have a history with them, MFI logbook loans can be the lifesaver.
- When You Need a Short-Term Loan, You Can Repay Quickly - Most logbook loans have a tenure of 3-24 months. They can go as long as 60 months. But many allow you to repay early with no penalties or you can negotiate for a short tenure if you are sure you can repay within this time. Especially for SMEs, the ability to repay early with no penalties means logbook loans can be utilised for short-term working capital.
Read in Detail: When Does Taking a Logbook Loan Make Sense?
How to Compare Logbook Loans
Well, with all their usefulness, logbook loans offered by non-deposit-taking Microfinance Institutions (MFIs) have varied terms and costs that make some appropriate for borrowers in certain circumstances and not others.
As such, with so many options available to everyone (no prior history with an MFI institution is needed for one to qualify), it is very important that one is armed with the right information to effectively compare and choose the option that best suits your needs and circumstances.
Some of the things to consider when comparing MFI logbook loans include;
- Do You Mind Paying Upfront Fees - if you do not have any cash on you when borrowing, upfront fees may be a bummer. You can get a lender that gives the option to capitalise or deduct the fees from the principal. You always have to think about your actual take-home amount when thinking about upfront fees.
- The Difference Between Market Value and Forced Sale Value of the Car - Make sure you understand how the lender calculates the FSV of your vehicle as this will impact how much you can get.
- The Percentage of the Car Value They Will Actually Finance - MFI logbook lenders in Kenya finance on average 50% of the vehicle’s FSV. But there are some that go as high as 75%. If you are looking for the highest amount possible, then the percentage financed will be an important factor in your comparison.
- Interest Rates - the interest rate of logbook loans offered by microfinance institutions in Kenya range from 3.1% per month to a high of 10% per month. Consider this and the effect other “fees” may have on the final loan cost. Monthly interest rate alone may not be sufficient enough to help differentiate between products. As such, calculating the Annual Percentage Rate (which includes fees) is the most accurate way of comparing loan options on cost.
- Hidden Charges - Often, slick advertising may promise you attractive terms, such as a high loan amount and low-interest rates, but not mention other fees that may be found in the fine print. As mentioned above, fees may significantly the cost of a loan over and above the marketed interest rate. So always inquire about all the fees related to the loan before making a decision.
- Other Terms and Conditions - factors such as the interest structure, early repayment, repossession policy, repayment frequency etc. are as important in determining whether you can afford to repay a loan comfortably or not.
Read in Detail: Things to Look Out for When Comparing Logbook Loans
Curious about how to fully compare logbook loans offered by non-deposit-taking microfinance institutions (MFI) in Kenya? This Friday, July 7, 2023, we will be hosting a webinar on this exact topic.
Sign up here to join our Commercial Analyst Hilda Nga’ng’a and our Managing Editor, Eric Ndubi for this informative session that will be broadcast live on Facebook.