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What is a logbook loan?

Posted 29 August 2016

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We explain everything you need to know about logbook loans.

If you’re asking the question ‘how does a logbook loan work’, you’ve come to the right place. We’ll explain what this type of borrowing is, take you through whether your car will be at risk if you borrow against it and also offer some advice if you’re finding it hard managing your finances at the moment. 

How does it work?

Logbook loans are a type of secured loan. They’re different from other secured loans because instead of borrowing the money and offering a property as security, the loan is secured against a vehicle. 

If you have a car, van or motorbike, you may be able to borrow money on the high street or online by getting a logbook loan. You borrow the money on the understanding that if you don’t pay the money back, the lender can repossess your vehicle. 

How much you borrow normally depends on the value of your vehicle, although some logbook lenders will only allow you to borrow up to half of what your car is worth. Logbook loans may be available to people with a poor credit rating, because the lenders know that they can take your car if you don’t make your repayments.

While you have the loan, you’re still able to keep and use your vehicle as normal but you have to hand over the documents of ownership to the lender. If you live in England, Wales or Northern Ireland, you will also have to sign a document called a ‘bill of sale’. This means that the lender now officially owns your vehicle. 

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Repaying the loan

As with any loan, you’ll have to pay interest on a logbook loans. Some agreements are based on paying just the interest back until the very last month of the agreement. Then, in the final month you pay the whole balance of the loan off in one go. Always make sure that you understand how the repayments work so that you’re sure you can afford them. 

You’ll normally repay a logbook loan over a 78 week period but you can pay some back sooner than this. This will cost you less as you won’t pay as much interest. 

Are they a good idea?

While logbook loans can seem like a convenient way to borrow if you need money, the interest rates can be very high.  When you’re taking out any form of credit, you should look to borrow money at the lowest rate possible so always shop around before you agree to anything. Compare rates with other lenders and always keep in mind the total amount you’re expected to pay back rather than just the amount you’re borrowing. 

And of course you need to consider the possibility that you’ll lose your vehicle if you fail to repay the loan. While this may not seem as bad as losing your house, it will still have a serious effect on your life. Getting to work, seeing friends or going somewhere on the spare of the moment may prove more difficult in these circumstances. 

You should also be aware that if you fall behind on your payments and they sell your vehicle for less than the amount that you borrowed, you will still be responsible for making up the shortfall. 

What does the Financial Conduct Authority say? 

The Financial Conduct Authority (FCA), the organisation that regulates financial firms, has voiced some concerns about this type of lending. Their research cast light on some problems in the industry, for instance consumers are sometimes:

• unaware of the details of their loan, like the total amount it will cost them and that they no longer own their vehicle once they take the loan out, 

• often don’t do any shopping around before they take out their loan, and

• they are sometimes given misleading or incomplete information from lenders and experience difficulties with paying the money back. 

The research also showed that lenders sometimes:

• charge high rates of interest plus added fees and charges,

• don’t always check that their customers can afford the loan, and

• see employment status as more important than the value of the car when they’re deciding whether or not to grant a loan. 

Having looked at these concerns from the FCA, it’s clear that you need to think very carefully before you take out this kind of loan. 

Are there alternatives?

There may be alternatives to getting a logbook loan that you haven’t looked into yet. As we said before, you should always be looking for the loan that will cost you the least in the long run. 

If you really need to borrow some money as soon as possible and you’re worried you won’t be approved for most personal loans or credit cards, you can look into applying for a budget loan from the social fund. These loans are provided by the Government and you don’t have to pay any interest on them. There are rules surrounding how much you borrow and who is eligible for this type of loan – you can read more about applying for this help here

Using your savings is always cheaper than borrowing so if it’s possible to save up for whatever you need the money for, focus on doing this instead. Saving will require more patience and may mean that you have to make some tweaks to your spending habits but it will save you the stress of knowing you have to make repayments by a certain time or run the risk of losing your vehicle. 

Check out our blog on leaking money if you’re looking for some tips on how to save successfully. If you’re struggling with repaying debts and you need some advice, our debt advisors are ready and waiting. For expert, free advice, just use one of the options on the left of the page. 

 

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.