Earlier this year, thieves broke into Jacob's electronic shop and stole almost half of his inventory. Jacob was set back, but he wouldn't let that hurt him. The shop was his primary source of income. He was determined to get back on his feet.
Jacob needed Ksh1,500,000 to repair and restock his shop. But he only had Ksh500,000 in savings. To make up for the difference, he started shopping for a loan. However, his efforts were futile as no lender could give him that much without a credit history.
Just as he was about to give up, Jacob came across a logbook loan ad. The lender offered a loan of up to 80% of a vehicle's value. Jacob had a 2014 Toyota Hilux that he estimated was worth at least Ksh1,500,000. He was confident he would get a loan, so he quickly applied.
The lender got back to him within an hour and sent him to an appraiser. After an evaluation, Jacob was told that his pickup truck had a market value of Ksh1,450,000 and a Forced Sale Value of Ksh1,000,000.
Jacob returned to the lender and was told they calculated the amount he could qualify for based on the vehicle's forced sale value. That meant the maximum amount Jacob could get was Ksh800,000 — 20% less than he sought. He turned down the offer.
So, why did the logbook loan lender use forced-sale value to determine the car's value? Why is it lower than the market value?
Logbook loans are short-term secured debt that uses your car as collateral. This means you can only borrow a portion of your car's worth. However, through their authorised appraiser, the lender decides your car's value.
When taking a logbook loan or other secured debt, the collateral is valued using different methods to estimate its monetary worth. In the case of a vehicle, market value or forced sale value is used. Let's look at the difference between the two.
Market value is the estimated value of an asset in an open and unrestricted market, where the asset is sold between a willing buyer and a willing seller. It represents the price at which a car can be sold in the current market conditions. It considers supply and demand, competition, and other economic conditions.
Selling a car at its market price takes time. It can usually involve listing the vehicle in different directories, hiring brokers, contacting used car showrooms, and dealing with prospects. It can also cost you money if you choose to advertise it. The most significant advantage of selling a car using its market value is getting the correct worth of your vehicle.
Forced sale value (FSV) refers to the price your car would fetch if sold in a distressed sale situation at an auction. In such cases, the sale may happen quickly, and the seller may not be able to wait for the optimal market conditions or take the time to find the right buyer. Therefore, the forced sale value is usually lower than the market value.
Logbook lenders use the FSV of your vehicle to determine how much to lend you. Depending on other factors like your creditworthiness, debt-to-income ratio, and loan term, they will offer you a loan amount equal to 20 to 80% of your car's FSV.
For instance, after an appraisal, your car might have a market value of Ksh1,000,000 and a forced sale value of Ksh700,000. You could qualify for the maximum Ksh560,0000, i.e., 80% of your vehicle's FSV.
When you take a logbook loan, you enter into financier-individual joint ownership with your lender through the NTSA in-charge process. That means the lender will hold the car's logbook and is considered the vehicle's temporary owner until the loan is paid in full. The in-charge process protects the lender and allows them to repossess the car if you default on your loan.
Once the car is repossessed, the lender will require that you meet your obligations and/or settle the whole loan within a specified period. If you fail to do so, they'll auction your vehicle to recover their money.
Therefore, lenders mainly use FSV to value your vehicle to lower their risk exposure should you default. They can repossess and sell your car at a distressed price at an auction, find buyers quickly, and recover their money.
Apart from risk exposure, FSV is also used because:
Read Also: Logbook Loan Dos and Don'ts in Kenya
The forced sale value is the amount a vehicle can be sold for quickly in a forced or urgent sale following repossession.
Before giving a vehicle an FSV, an appraiser will typically determine the vehicle's market value by looking at different factors, including:
Once the market value is determined, the appraiser will assign the vehicle an FSV, which can be less than the market value by as much as 25%. If your car is worth Ksh1,000,000, its FSV can be Ksh750,000. The lender will then offer you a loan representing a percentage of the FSV.
If you default and the car is repossessed, it might sell at a different value than its current market value or FSV. It might sell for more or less. If it sells for more, the law requires the creditor to give you all the remaining money after all fees are paid. Conversely, if the creditor won't recover their money after an auction, they will sue you to pay the remaining money and can lay a claim on your other assets.
Now that you understand how the forced sale value works, you must consider whether it is the right path. FSV can only be used when using your car as collateral for the logbook loan and is lower than your car's market value.
To leverage your car's market value, you can do two things.
Sell it: This will involve putting the car on the market and selling it for its market value. It can take time, but you will get its worth.
Trade-in: This method involves exchanging your car for another with a market value lower than yours. The owner of the other car will pay you the additional cost. For instance, if you have a Mitsubishi Outlander 2016 worth Ksh3m and need Ksh1m, you can trade it for a car worth Ksh2m like Volkswagen Golf 2015.
You should use your market value if:
While taking a logbook loan might be an easy way to access quick money during an emergency, you must factor in the risk. The biggest one is that you could lose your car.
If you think you risk defaulting after taking a loan, you should alert the lender immediately. You can negotiate, refinance your loan, or request voluntary repossession. Voluntary repossession can be cheaper than forced one.
Finally, consider your current and future financial situation when taking a logbook loan. This will help you decide whether to use the forced sale or market value.