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Logbook loans are growing fast, but what are they and what do they involve?
For all the economic troubles over the past few years it is perhaps surprising that our addiction to debt remains unsated. With debt rising faster than ever since the 2008 crisis, more and more people are finding themselves struggling to make ends meet. However, the banks are still more cautious about who they lend to. This means alternatives such as logbook loans can seem tempting.
What is a logbook loan?
A logbook loan involves borrowing by taking your car as security. You can get them between £500 and £5,000 depending on the value of your car. Once you’ve taken out a loan, you will temporarily surrender ownership of the vehicle to the lenders. You will only get it back once you’ve successfully paid off the loan.
The trouble is this can be difficult. As with most loans aimed at people with poor credit ratings interest rates can be punitively high. You can expect to be paying interest of around 400% APR making these one of the most expensive forms of finance out there. A typical loan period could be as long as 78 weeks which means the cost of even short term cash will be extremely high. Of course, you should be able to pay off the loan earlier. Beware because it won’t take long before the costs mount up.
There are attractions to a logbook loan. It’s accessible for people who do not have sufficient credit ratings to secure a cheaper unsecured personal loan from a major financial institution. Money can come quickly – you’ll only have to wait for a cheque to clear before it enters your bank account. This is why many people see this as a form of short term cash.
According to the Citizens Advice Bureau logbook loans look set to increase by a whopping 61%. Those that do can find themselves subject to aggressive practices including death threats. The charity highlights the story of a mother and child who were left stranded on the roadside after a lender took their car without even allowing them to collect their belongings.
Moreover, some second-hand car buyers find that their new car has a loan taken out on it without their knowledge. In that situation a lender can still take their car even if they didn’t take out the original loan.
It is a path you should think very carefully about before you decide to move forward. These loans are expensive and there are plenty of unscrupulous operators out there.
If you still decide to go ahead, then you should find out as much as possible about the company you’re working with. Make sure they are signed up to codes of good practice and be sure you understand all the costs involve. Some can add hidden fees such as a charge for fast transfers. This could be as much as 4% of the original loan amount.
Lending structures can differ. Some, for example, will let you pay back only the interest throughout the term of the loan before you pay back the original cost of the loan on your final month. Without careful planning this could leave your car at risk even though you’ve already paid out a considerable sum.
In almost all situations the advice is to avoid logbook loans like the plague. They can seem tempting for someone with poor credit but there are almost certainly other, cheaper, forms of finance available.