Would you want a loan secured against your car? Serena Cowdy looks at why this 'logbook lending' should be avoided.
With the credit crunch biting deeper, more loan and credit card applications are being rejected - and this trend looks set to continue.
And unfortunately, many people in desperate need of credit are now turning to alternative, more expensive loans for quick access to cash.
Today, I'm going to look at the practice known as `logbook lending'. I'm going to examine what it is, why people resort to these loans, and just how damaging they can actually be.
'Logbook lending' - what is it?
In a nutshell, `logbook loans' are loans secured on your car. Specialist companies lend you a percentage of the trade value of your vehicle, and in return they charge astronomic levels of interest.
The lender you deal with will hold on to the original documents associated with your car, including the V5 registration document (otherwise known as `logbook'), the MOT certificate and the insurance certificate.
You'll also have to sign a credit agreement and a `bill of sale'. This temporarily transfers car ownership to the lender - and gives them the right to take possession of it if you fall behind with your repayments.
If the worst does happen, your car will be sold at auction. The sale money goes to the lender - and you then have to pay them any shortfall between the sale price and the value of the loan.
Why do people choose them?
Most of these companies say you'll get your money within 24 hours (one I found said you'll get it within 30 minutes!) so if you're desperate for quick cash, they may seem like a good option.
And you generally won't have to undergo a credit check. In fact, these companies deliberately target people who have poor credit histories, County Court Judgements against them, are in arrears, or have no credit histories at all.
So - they may seem like the last-chance saloon for people unable to get credit anywhere else.
However - `logbook loans' are a high-risk, extremely expensive way to borrow money. Here's why I think you should avoid them if at all possible:
437.4% APR!
No, that's not a typo.
Here's an example taken from the website of one such company, Logbook Loans:
Loan Amount | Weekly Repayment | Loan Term | APR | Total Repayable |
|---|---|---|---|---|
£1,500 | £53.60 | 78 weeks | 437.4% | £4,180.80 |
That means over the term described, you're borrowing £1,500 and paying back nearly twice that in interest. Yikes!
And Logbook Loans is not alone. Most of these lenders charge interest at rates of well over 300%.
Of course, you can lose your car if you default on a payment - and given the enormous interest rates, your debt could get out of control very quickly.
Temptation
One of these firms tempts borrowers with pictures of huge wads of cash, and notes stuffed into the back of an open-top car.
This sort of advertising leaves a really bad taste in my mouth, because it doesn't encourage responsible borrowing. Instead, it implies a level of carefree luxury which these loans can't ultimately deliver.
No FSA
'Logbook loan' companies aren't regulated by the FSA - and they're not under any obligation to comply with the FSA's fair customer treatment guidelines.
To operate, they just need to have a Consumer Credit Licence from the Office of Fair Trading (which brings them under the Consumer Credit Act).
What are the alternatives?
Well, the obvious alternatives are a 0% credit card or a low-interest personal loan. However, if your credit record isn't great, you may have been rejected for these products.
However, there are other avenues you can explore, before you succumb to the lure of a logbook loan. As my colleague Laura Starkey explained in A Dangerous Way To Deal With Debt, there are still credit cards you can apply for.
The Capital One Classic Visa Card and the Aqua MasterCard are two of these. Their interest rates are high - typical APRs of 34.9% and 35.9% respectively.
But they're still a heck of a lot lower than those associated with `logbook loans'! And, if used responsibly, these credit cards allow you to build, repair and improve your credit history, so you may be able to get lower interest loans in the future.
More: When Debt Brings Down The House | How To Choose The Best Loan
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