Logbook Loans: Understanding Market Value Vs Forced Sale Value

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? 

Read Also: All You Need to Know About Logbook Loans in Kenya

What is The Difference Between Market Value and Forced Sale 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.

Read Also: Things to Look Out for When Comparing Logbook Loans

Why Logbook Lenders Use Forced Sale Value

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:

1. Market fluctuations can drive prices and demand for vehicles low in the future. 
2. Cars are depreciating assets. The older it gets, the less valuable it becomes.

Read Also: Logbook Loan Dos and Don'ts in Kenya 

Factors That Affect the Value of Your Car

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: 

1. Market data: Appraisers will gather information on recent sales of similar vehicles in the same geographic area to determine the car's current market value. The data will also show demand; If there is high demand for the car, you can command a higher price in a forced sale.
2. Make, model, and year: The car's make, model, and year are the main factors determining its value. Newer models and popular brands often have higher values than older or less popular ones.
3. Condition assessment: Appraisers will inspect the vehicle to assess its overall condition and identify any defects or damage that could affect its value.
4. Mileage: Mileage indicates how much wear and tear a car has gone through. Lower miles generally mean longer life from most vehicle parts, hence higher value. Mileage might be overlooked in vehicles designed to last longer, like trailers. 
5. Depreciation: The age of the car and its overall depreciation rate will determine its current value. Classic cars have higher values if they are in demand and appreciating in value.
6. Previous use: A vehicle used primarily on highways may have less wear and tear than one used for off-roading or rugged locations like Northern Kenya. The vehicle's location can provide important context for understanding its condition and may impact its value.
7. Ownership history: The number of people who previously owned the car can affect its value. If the vehicle has changed hands numerous times, the appraiser might want to know why.
8. Accident history: If the car has been involved in an accident before, this may lower its value.

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.   

Read Also: 6 Reasons Why Kenyans Prefer Logbook Loans During Emergencies 

How to Qualify for Higher Logbook Loans 

• Service your Car Regularly: Lenders consider the vehicle's condition when determining the loan amount they are willing to offer. By servicing your car regularly, you can ensure that it is in good condition and well-maintained, which could increase its value and your borrowing power. Additionally, you should ensure that you keep your car service receipts.

• Upgrade Your Car Features: Making the right upgrades, such as getting leather seats, wheels and tires, and an exhaust system, can improve your car's appearance and performance. Ensure that you consult a professional before making any upgrades, as some modifications will disqualify you from a comprehensive cover which is a requisite for a logbook loan.

• Invest in Comprehensive Insurance: Some logbook lenders will require that you have comprehensive insurance before they loan you money. If you don't already have this, you might qualify for less loan or be outright denied. In other instances, you will be forced to buy one, which can increase your total loan cost.

• Fix any dents before applying: Have your mechanic look at your vehicle before you take it to the lender for appraisal. A small leakage or delayed oil change might signify to the lender that you are careless. This can reduce how much you are offered and the terms you receive.

Read Also: Advantages and Disadvantages of Logbook Loans in Kenya

When to Use the Market Value of Your Car

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:

1. You don't need the money urgently and can hold on until you find a willing buyer.
2. You don't want to pay the high interest and fees associated with logbook loans.
3. You can't take a loan because you lack a repayment plan.
4. You don't own 100% of your car; the other joint owner won't co-sign a logbook loan.
5. You can't find a logbook lender to lend you because of your car's condition, credit history, or other reasons.

Read Also: Things to Consider Before Taking a Logbook Loan in Kenya

WRAPPING UP

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.