Are you thinking of getting a logbook loan? Then you need to understand the dangers you face, including how you could lose your vehicle and how repossessions work in case of default.
Logbook loans are short-term secured debt products that use your car as collateral for a loan. They are a convenient way to borrow money, especially during an emergency or when you can't access financing from traditional lenders like banks. But that convenience often comes with a price that most borrowers might be ignorant about.
When you take a logbook loan, pay it on time, and stick to the terms and conditions of your agreement with the lender, you will usually have no issues. But problems can arise when you default on the loan. When that happens, the creditor will repossess your vehicle, and you could lose it.
In this article, we will explore how car repossessions happen when you default on a logbook loan and highlight some signs that could show you are not a good candidate for a logbook loan.
After you have been approved for a logbook loan, you will need to get into a temporary individual-financer joint ownership arrangement with your lender. The provision is made through what's called the NTSA in-charge process.
But this type of joint ownership is different as it creates a lien on your car and gives the lender temporary ownership and claims on your vehicle. Lenders Use the NTSA in-charge process to protect themselves should you default. It also gives them the right to repossess your car and sell it to recover their money.
Apart from the NTSA in-charge process, lenders can also use the Movable Property Security Rights Act 2017. This act of Parliament facilitates the use of a movable property as collateral for credit facilities. A financier will usually use it following a default to repossess your car. Here are the eight main sections of the act that you need to pay attention to when taking out a logbook loan:
If you don’t comply with the notification within a specified period (usually seven days), this section gives the creditor the right to:
The decision to take out a logbook loan comes with obligations and commitments. Failure to meet these obligations could result in default and repossession of your car.
Before taking a logbook loan, assessing your current financial situation is important. This will help you identify any financial red flags that may impact your ability to repay the loan.
Unlike other types of loans, you only need to have your name on the logbook to qualify for a logbook loan. This minimum requirement can make you think you can afford the loan. But in reality, it can expose you to more financial troubles.
With that in mind, how do you gauge your ability to take a logbook loan?
These seven signs say you are likely to default and lose your car if you take a logbook loan:
One of the main factors logbook lenders look at when deciding how much money to lend you is your vehicle's forced sale value (FSV). FSV refers to the minimum amount your car might sell for at auction under unfavorable market conditions. When taking a logbook loan, a financer can lend you as much as 80% of your car's force sale value.
But that doesn't mean you should borrow that much. You should only take as much as you need.
For instance, if you need Ksh50,000 to settle an emergency hospital bill, your lender can offer you as much as Ksh300,000. This can be a tempting offer, and you might start thinking about all your other financial problems.
But before you fall for the temptation, think about all the negative effects it could cause. Remember, the more you borrow, the harder it will be to repay and the more likely you will default.
Before applying for a logbook loan, have a solid plan of how to use the money. This will help you determine the amount you need. Take a loan only for a specific reason after you have exhausted all options. If you have a figure in mind, look for ways to reduce it instead of padding it with an extra amount.
This is one of the most important things you must lock down before taking any loan. If you don't have a repayment plan, it's best to avoid taking it.
Unlike personal or business loans, logbook loans are short-term financing. The repayment window is usually three to twenty-four months. During that term, you cannot afford to miss a single repayment as the lender will constitute it as default and proceed to repossess your vehicle.
To determine your ability and plan to repay the loan in time, consider how you intend to use the loan. If you plan to use it for consumer reasons, you will repay the loan out of pocket. If you intend to invest it, ensure that you have assessed all the risks involved and the viability of your investment.
If you don't have a plan to repay the logbook loan in full and on time, consider the following options:
Logbook loans come with a number of fees, which can add up and make the loan too expensive. The cost of a loan is determined by adding up the principal amount, the interest, and the fees you have to pay for that loan.
For a logbook loan, these fees will include valuation fees, logbook search and NTSA transfer fees, car tracker, comprehensive insurance if you don't have one, application fees, processing fees, and bank fees.
You should also consider the type of interest you are getting. Is flat rate or reducing balance method? The former is more expensive. Additionally, is your rate fixed or variable? A variable interest rate suggests the cost of your loan could go up if your lending rate increases.
Finally, consider the repayment term. The longer the repayment term, the more interest you pay.
Before you take a logbook loan, add up all the costs you will pay. This will help you understand if the loan is worth taking. For instance, if you need a Ksh100,000 loan, but the costs add up to almost half what you need, you should consider alternatives. Additionally, if you have to borrow to finance the initial costs, you should take a step back and rethink your approach.
While taking a logbook loan to repay another loan might seem like a good idea in the short term, you should consider its long-term effects. The immediate impact is that it will increase your debt burden. If you cannot repay the previous debt, you will likely struggle to repay the new one increasing your chances of default and losing your car.
Taking a loan to repay another loan could also lead to a debt cycle. This could not only lead to bigger financial troubles like financial instability.
Additionally, taking a logbook loan to repay another loan could lead to higher fees. When lenders run a credit check and notice you already have outstanding debt, they will consider you high risk, which can affect the term they offer you.
Taking a loan to repay another loan shows you are a risk of default already. To avoid this, you can try strategies such as:
The kind of deal you get when applying for a logbook loan can decide how likely you are to default. If you pick the first lender you come across, you might pay more or get bad terms. To avoid this and any other pitfalls, you should take time to shop around and compare different lenders.
Here are three things you should compare:
If you plan to take a loan, use Money254 Comparison Portal to Compare different Logbook loan lenders based on; loan amount, repayment duration, interest rates, and more.
Emergencies are part of life. They can happen when you least expect them. When they happen, if you have a loan, they can significantly affect your ability to service your obligations.
If you didn’t plan for emergencies and they happen while you have a logbook, your chances of defaulting will increase.
For example, John took an emergency logbook loan of Ksh200,000 to be repaid in 15 months. He planned to repay the loan using his salary. Unfortunately, he lost his job in the ninth month and could no longer service his debt. Facing repossession, he had to refinance his loan and negotiate with his lender to allow him to sell his car.
Apart from the loss of income, other emergencies you should prepare for include; major life events like death and medical expenses.
Considering that emergencies are inevitable, he's what you should do when taking a logbook loan:
While logbook lenders promise to offer you a loan even if you are listed in CRB, this usually comes at a cost. Your creditworthiness usually indicates your ability to repay the loan responsibly. If you have bad credit, a lender will consider you high risk and offer less friendly loan terms.
What does this mean?
First, you will likely receive less money than someone with a good history. Second, your loan will be more expensive, and you will be charged higher interest. Finally, the tenure will likely be shorter with even more condensed repayment intervals.
Add this together, and your chances of default will be higher. For instance, a lender can require you to service a loan weekly, which can be challenging compared to paying monthly.
You should question your ability to repay the loan and your repayment plan. If you don’t have a solid plan, consider a different financing alternative or liquidation. If your credit history doesn’t affect your ability to service a debt, you should consider getting a CRB certificate you can show a lender to get better terms.
Logbook loans can be a viable option for people who need quick cash but may not qualify for a traditional bank loan or other forms of financing due to one reason or another. However, you must approach it clearheaded to reduce the chance of defaulting and losing your car. Look out red flags discussed above to ensure you are ready to borrow.
If you have already borrowed and think you are at risk of default, consider talking to your lender ASAP! They will help you refinance your loan or help you create a solid plan to prevent repossession.