One of the growing types of sub-prime finance in the UK is what is known as a ‘logbook loan’. The lenders claim that logbook loans are an “easy, fast and hassle-free solution to your financial needs”. But by looking a little deeper, we find that there are significant drawbacks to taking out a logbook loan.
In essence, you surrender ownership of your car to a finance company in return for a short-term loan of money at a massive rate of interest. It is one step up from the much-derided payday loans which exploit financially vulnerable people who want money quickly.
What is a logbook loan?
A payday loan is an unsecured short-term loan, which means credit checks and the likelihood of being rejected if you have adverse credit history. The principle of a logbook loan is that of a secured short-term loan – with your car as security – so the lender doesn’t have to conduct those pesky credit checks to see if the borrower is likely to ever repay the loan.
With a logbook loan, the lender (not a well-known high street bank, by the way, but a lender you will have never heard of and will probably have difficulty tracing) takes ownership of your vehicle for the duration of the loan and ‘lends’ it back to you to drive until the loan is paid in full.
The theory goes 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 once again.
So what’s the 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.
On top of that, the rate of interest is frankly horrific. Most logbook loan providers are advertising an APR of nearly 500%. The APR is the Annual Percentage Rate, which includes 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.
So who owns your car with a logbook loan?
Until you repay your loan in full (plus any charges you may have accumulated during the course of the loan), the lender owns your car. You surrender your vehicle logbook (the car’s 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 sell your car. The lender does not need a court order to be able to repossess your car. In addition, these charming folk can charge you for the costs associated with repossessing and selling your car.
And if the money they get from selling your car doesn’t fully cover the outstanding balance, they can come after you again for the shortfall. The sale of the vehicle does not necessarily put an end to the loan.
Now, the lenders generally stress that repossessing your car is a last resort and that they will always try to work with the customer to make alternative arrangements. However, those ‘alternative arrangements’ may include hefty penalty fees and charges if the lender has to call you to remind you to cough up your weekly or monthly payment.
What is an APR and what does it mean?
An APR is a measure of how much it costs to borrow money. It must be quoted by lenders and companies offering any sort of loan or finance (such as mortgages, credit cards, car finance, bank loans, payday loans or logbook loans). The APR includes any fees charged by the lender as well as the interest, spread over the period for which you are borrowing the money.
The APR tells you how much your borrowing will cost over the course of a year, as a proportion of the amount you have borrowed. All lenders are required to show the APR and an example of a typical finance repayment schedule to help borrowers understand how much they are expected to repay.
For long-term loans, like a mortgage, the fees are spread over a very long period (eg – 25 years), so even if the lender’s fees are high, the APR remains fairly low.
For short-term loans like payday loans and logbook loans, the fees are applied over a much shorter period (a payday loan is normally arranged for a period of a few weeks, and a logbook loan may be a few months to a couple of years). Therefore, the fees are spread over a much shorter period and add a relatively large amount to each payment.
And those fees are high for logbook loans. Remember, these are small-time lenders offering finance to financially vulnerable borrowers with poor credit histories or poor financial management skills, so there is a high risk that the loan will not be repaid on time or in full. High risk means high fees and high interest. Most logbook lenders are quoting typical APRs of nearly 500%, meaning a loan of £850 means repaying about £2,500.
What is the risk for borrowers?
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 virtually unknown lenders who 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 (eg – another unexpected and urgent expense) can 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. You would probably be better off selling your car in the first place to avoid having to take out the logbook loan at all.
Despite the websites that would have you believe that logbook loans are a simple and effective way to meet your financial needs, the reality is that nobody wants to be left in a position of having to seriously consider taking out a logbook loan. If you can manage your finances without having to take out a logbook loan, you will almost certainly end up better off.
Further reading on car finance:
Car finance glossary: A fantastic resource for car buyers, explaining all the terminology used in car finance in the UK.
Car finance – what you should know: The Car Expert explains the different types of car finance available for new and used cars.