One of the growing types of sub-prime finance in the UK is known as a ‘logbook loan’. Lenders claim that logbook loans are a fast, hassle-free and an easy solution to your financial needs. But if you look a little closer you will find that the ‘cons’ outweigh the pros when taking out a logbook loan.
So, in essence, taking out a logbook loan basically means you are surrendering ownership of your vehicle to a finance company in return for a short-term loan of money at a very high rate of interest. This method of securing a loan can be likened to the much publicised and criticised payday loans, which have been accused of targeting vulnerable people who need money quickly.
What is a logbook loan?
A payday loan is an unsecured short-term loan meaning you will be credit checked and stand a good chance of being rejected if you have poor credit history. The principle of a logbook loan is that of a secured short-term loan using your car as security so the lender doesn’t have to conduct a credit check to see if the borrower is likely to ever repay the loan. With a logbook loan, the lender (which will not be a well-known high street bank but more likely an unknown difficult to contact lender) takes ownership of your vehicle for the duration of the loan and lets you drive it until the loan is paid in full. The theory here is that you simply keep driving around in the car while you pay off the loan, and once you have cleared the loan in full the car becomes yours again.
Is there a catch with logbook loans?
The main catch is that you sign your car over to the lender in return for borrowing their money, and if you fall behind in your payments then they can repossess and sell your car that leaves you with bad credit and no vehicle.
A point to note of interest is that logbook loans have huge annual percentage rates attached to them. Most logbook loan providers are advertising an APR of nearly 500%. APR is the Annual Percentage Rate, inclusive all of the fees and interest that you pay on the amount borrowed, and helps borrowers to understand how much they will be repaying over the course of a year. In the case of a logbook loan the repayments are huge.
Who actually owns your car with a logbook loan?
Until you repay your loan in full including any charges you may have accumulated during the course of the loan the lender owns your car. You surrender your vehicles logbook (this is the legal registration document) to the lender as part of your loan agreement and the lender may have the car transferred from your name into theirs. Although you continue to drive the car, if you default on your payments then the lender has the right to repossess and or sell the vehicle. The lender does not need a court order to be able to repossess your car. Be aware that the lender can also charge you for the costs associated with repossessing and selling your car.
So, if the money they get from selling your car doesn’t fully cover the outstanding balance the lender can come after you again for the shortfall. Be aware that the sale of the vehicle does not necessarily put an end to the loan.
Lenders nowadays stress that the repossession of your vehicle is a last resort and they will always try to work with the customer to make alternative arrangements. Once again you need to be aware that these helpful people can include large penalty fees for reminders and missed payments.
Is there risk for borrowers?
Logbook loans are aimed at people who would otherwise struggle to get a loan from a regular bank. This would be because they don’t have a job or have poor credit history. Regardless of whether they were at fault or not for their financial troubles, these people are financially vulnerable in that they need cash fast and have no reserves of their own to pay their bills as they arise.
Because the borrowers need (or want) the money urgently and are not able to get funding from more reputable sources, they are left at the mercy of these virtually unknown lenders who, as explained, charge huge fees and rates of interest for access to their loans. In addition, the conditions can be so strict that any failure to keep up the required payments can and does result in severe financial penalties, which make paying off the loan virtually impossible for the borrower. Eventually, the car gets repossessed or the borrower voluntarily surrenders it to the lender to try and settle the loan. The borrower’s credit history takes a further hit, which makes it even harder to get a loan in the future. In theory you would probably be better off selling your car in the first place to avoid having to take out the logbook loan at all.