Logbook loans: are they risky?
"I'm thinking of taking out a logbook loan because I don't have good credit: are they risky?"
Logbook loans can help individuals who might not be able to borrow money by conventional means, for instance by taking out a personal loan, by using a car as collateral.
However, you're right that it's a risky way to borrow: there are numerous traps waiting for consumers who do not have their eyes open to the pitfalls of borrowing money in this way.
Read on for the full picture on logbook loans, or click below to skip to:
Logbook loans: the risks
The appeal of a logbook loan lies in the promise of quick cash without the need for a credit check, which makes them particularly attractive to customers with a poor credit history.
On the face of it, a logbook loan looks very much like any other loan. However, there are several major differences which can make this method of borrowing extremely risky, especially for those that already have a poor financial history.
What exactly is a logbook loan?
In simple terms, it is a loan secured against a car, in much the same way a mortgage is secured against a house.
Logbook loans are available in sums ranging from £500-£50,000. The maximum amount that can be borrowed is determined by the official trade value of the vehicle you're borrowing for, normally up to 50% of its trade value.
To secure the debt, the customer hands over the vehicle's logbook or registration document and signs a temporary 'bill of sale' to the lender. The customer can continue to use the car for the life of the loan although, technically, it belongs to the lender.
Logbook loans traditionally run for 78 weeks and are paid on a weekly or monthly basis. It is possible to pay them off early, although that can potentially result in early repayment charges.
There are three main risks.
1. High interest
Expect the interest charged on a logbook loan to be very high.
The annual percentage rate charged (APR) on a logbook loan will be at least 400% APR if not higher.
To place that in real terms, a logbook loan customer borrowing £1,500 over 78 weeks (so repaying £55 a week) would repay a grand total of more than £4,250. That's a massive £2,750 of interest just to borrow £1,500.
Loan companies justify the high interest rates by stressing that a logbook loan should only ever be utilised as a short term borrowing solution.
Sadly, the type of customer attracted to a logbook loan tends to be the type of customer who could never use it in this manner in the first place.
The most serious and worrying aspect of taking out a logbook loan is what happens if a customer falls behind with repayments.
When a customer signs over a vehicle to secure a logbook loan they do so with the knowledge that the car could be taken from them if they default on the loan.
When the loan is agreed the lender will have the 'bill of sale' registered with the High Court. This makes it lawful for them to repossess the car if the borrower fails to keep up repayments on the loan.
The company will then sell the vehicle to recover the defaulted sum.
The circumstances under which a vehicle can be repossessed vary wildly from lender to lender.
Normally, a logbook loan company won't take steps to repossess a vehicle until several payments have been missed.
However, this can also prove costly. Some companies charge for every phone call or letter they make to borrowers. They may also instruct a specialist repossessions agency to collect the vehicle. The agency will charge for this service and it often runs into hundreds of pounds.
All these extra charges are added to the default sum making it impossible for many borrowers to ever repay the debt, let alone recover the vehicle.
3. Debt collection practices
Adding to the problems with repossession above is the way in which logbook loan companies handle borrowers who have fallen behind with their payments, which can be questionable.
Many borrowers report a constant stream of harassing calls and letters, demanding immediate repayment, and some have even opened their front doors to find 'repo agents' waiting to seize the vehicle.
One lender took steps towards repossession after a customer missed just a single repayment.
Another lender specified in the conditions of the loan that they could break into a borrower's property to repossess a vehicle if it was warranted!
Logbook loans: important considerations
To sum up, then, those that are thinking about taking a logbook loan need to make some important considerations.
- Although all logbook loans will have a high APR they can vary by hundreds of percent: it's worth shopping around for the best rate.
- Interest will be charged either weekly or monthly. Interest calculated on a weekly basis for loans repaid weekly will work out cheaper overall than interest calculated on a monthly basis and repaid weekly.
- Being able to make overpayments without penalty could save hundreds of pounds and it's worth checking this in the loan terms.
- The terms and conditions of a logbook loan can vary a lot between providers, check before signing any agreement, including the lenders rights in terms of repossession.
Another risk: buying a car with an existing logbook loan
Logbook loans don't just pose a risk to the customers who take them out.
Increasingly, members of the public who buy second-hand cars privately are being stung by old logbook loans still outstanding on the vehicle.
Because ownership of the vehicle was originally signed over to the loan company with a 'bill of sale' they remain its legal owner until the debt is repaid.
This means they are within their rights to repossess a vehicle, even after it has changed hands, regardless of who may think they actually own it.
The only way to determine if a car has outstanding debt secured against it is to carry out an HPI check before purchase. This check will reveal the vehicle's true financial history, something the seller may not do.
HPI checks reveal that roughly one in four cars have a murky financial past, making it an essential step in the second-hand car purchase process.
Unfortunately, most buyers fail to carry out a HPI check before purchasing a second-hand car.
Find out more on car buying options in this guide.
Alternatives to logbook loans
For most people forced into the position of considering a logbook loan there are few viable alternatives.
The ease associated with obtaining money from a logbook loan makes them especially attractive to those who have been refused borrowing elsewhere or who are already in financial difficulties.
Logbook loan companies do not make credit checks on borrowers and do not always conduct detailed income and expenditure checks prior to agreeing a loan.
However, people who are already facing a complicated or poor financial situation are exactly the kind of people who shouldn't consider a logbook loan.
Just as with payday loans, however, there are alternatives. See our guide to payday loan alternatives for some ideas here.
With the main reason for taking out a logbook loan cited as 'repaying debt incurred elsewhere' it would be far better for borrowers to talk through their options with Citizens Advice or the Money Advice Service first.
There are a lot of free debt advice options out there, in fact: find out more in our guide to advice.