Logbook loans are easily accessible for car owners, and can be a convenient way of securing financing. If you're currently struggling to get a personal loan, they can seem tempting but you should try to avoid them as the cost of borrowing is dangerously high, and can lead to you to further financial difficulties.
Otherwise known as 'V5' loans, logbook loaning is a form of 'secured' lending, in that you stump up your car or other vehicle as collateral should you not be able to afford the repayments.
How much can I borrow?
Depending on your circumstances and the value of your vehicle, you can generally borrow anything from £200 to £50,000. Generally the period payback is set at around 18 months, although some lenders are now offering loans for periods of up to 3 years.
How much will I have to pay back?
The interest rates for logbook loans are much higher than those of standard bank loans, yet much less than payday loans; sitting somewhere in the middle, with APR rates of around 400%. Because of this, logbook loans should not even be considered as a last resort. There may be alternative forms of help you're yet to discover: credit unions, social funds, and peer-to-peer lending being amongst those currently advocated by financial experts.
To give you an idea of just how expensive they can be; if you took a £1,500 loan, paying back £55 per week over the 78 month term, you would end up paying back £4,250 in total – that's nearly three times the amount you borrowed!
Reasons to be wary
Other than the potentially crippling financial implications, there are other concerns with logbook loans which need to be raised.
First of all, you'll be asked to sign a credit agreement called a 'bill of sale'. This technically means that the lender now owns your vehicle and grants you access to it for as long as you can maintain the repayments. In practice, this means that your car can be repossessed by bailiffs at any point if you break the payment schedule. Unfortunately, users of logbook loans don't yet have the same level of protection as consumers of other credit contracts, such as 'hire car purchase agreements'.
Aside from that, lenders try to penalise 'good' borrowers, by including penalty fines for those who wish to pay back the loan early. And if that wasn't enough to put you off, other providers insist on weekly repayments, (perhaps) deliberately not accepting direct debit payments, making it easy for you to fall prey to late penalty fines and charges.
As mentioned previously there are several alternatives to logbook loans. These are all targeted towards those with difficulty obtaining credit from mainstream sources and include employer advances, credit unions and social fund loans. You'll find more information on this in our 'alternatives to payday loans' article.Image: © Ginasanders | Dreamstime.com