Log book and payday loans: Why they are best avoided
Recent years have seen a huge growth in people taking out loans using a vehicle as security or based on their next pay day — but they cause more problems than they solve.
- Dangers of log book loans explained
- Why payday loans are best avoided
- What better alternatives are there?
As mainstream lenders and finance companies have become more rigorous in checking applicants' credit history in recent years, many people who find they have a low credit rating have turned to alternatives such as log book and payday loans.
Yes, your options are limited if you have a poor credit history making log book and payday loans seem like attractive options.
The reality for many is that while they appear to be quick and easy short-term solutions to financial troubles, they can end up making the situation far worse.
They require handling with extreme care, so before you apply for one it's vital to ensure you have explored all other alternatives.
What is a log book loan?
This is a loan that uses your car, van or other type of vehicle as security against it. They are usually availabe to any vehicle owner who applies for them and no credit checks are performed.
When you apply for a log book loan, the lender will offer a percentage of the vehicle's trade-in value — not its retail price — which may mean the amount of equity released is significantly lower than you had initially expected. On the positive side, of you accept the offer, the money is transferred to you very quickly.
Essentially, log book loan providers operate similarly to pawnbrokers but while you will keep your vehicle during the time repayments are made, the lender possesses its documentation, including the V5C — commonly known as the log book. You will sign a credit agreement and a bill of sale, which gives temporary vehicle ownership to the lender.
Note that log book loans are only available in England and Wales as Scottish law regards bills of sale as invalid.
While you maintain your repayments all is welll, with the V5C being returned to you once the final payment has been made.
However, grossly inflated interest rates on log book loans, typically around 300% APR, mean that many can't afford to keep up those repayments, resulting in the vehicle being taken away — the cost of which you will be liable for — and auctioned off. If the sale price is insufficient to cover the outstanding balance of the loan you are still legally required to pay back that difference.
Don't buy a used car with an outstanding log book loan against it
If you have bought a used car that has the balance of a log book loan against it, it could still be repossessed and resold to help pay off the outstanding debt.
Legally, the seller of the vehicle is required to inform potential buyers that it has the balance of a log book loan secured against it. If the sale still goes ahead, the purchaser risks losing the car, even if they have the V5C log book. The V5C is proof of who keeps the vehicle, not who owns it.
Performing a detailed car history check, which will highlight any kind of outstanding finance on a vehicle as well as information about whether it has been written off, gives potential buyers a further degree of protection, particularly if the seller unscrupulously fails to mention any outstanding log book loan balance.
The best advice is simply not to buy a car with the balance of a log book loan against it.
What is a payday loan?
These loans are essentially advances on your wage or salary, designed to cover short term cashflow problems.
A loan of typically up to £1000 can be applied for with the expectation that it will have been paid back in full within the month. The cash is immediately transferred to the applicant's bank account.
Interest on these loans used to astronomical with APRs typically being in excess of 1000%. However, back in 2014, pay day loans were tranferred from being under the auspices of the Office of Fair Trading (OFT) and placed under the regulatory control of the Financial Conduct Authority (FCA), which set about making the rules fairer for borrowers, although they remain one of the more expensive forms of credit available.
How has the FCA improved payday loans for borrowers?
Increased regulation is sometimes portrayed in the mass media as undesirable but in the case of payday loans, the FCA has significantly improved matters.
While payday loans are still expensive, they are less fraught with difficulties for borrowers than they used to be. Since 2015, the FCA has:
Required high-cost, short-term (HCST) lenders to apply for a rigorous authorisation process with ongoing compliance checks before being granted permission to offer loans.
Capped the daily interest rate at 0.8%, equal to £24 per £100 borrowed over a 30-day period.
Capped the total cost of interest and other charges at 100% of the original loan value, so in a worst-case scenario a £100 loan would cost a maximum of £200. This effectively restricts loan extensions and rollovers which incurred even higher interest rates.
Capped charges on default payments at £15 per instance.
Required fully transparant prices and interest rates visible on all adverts and promotions.
Made it an obligation for HCST lenders to submit product details to comparison websites.
Insisted upon affordability verifcation of applicants, including credit checks, before loans are agreed to.
Better alternatives to log book and pay day loans
If you are considering log book and payday loans, the chances are you are doing so because your options are limited due to a low credit score, meaning better-value options such as bank loans and overdrafts are less likely to be available.
The good news is that there are still some lower-cost alternatives for borrowing money:
Extra hours at work
If your personal circumstances permit and your employer is able to accommodate your request, earning more money will be a better alternative than borrowing. Similarly, an empathetic manager may be able to approve an advance on your wages to cover a temporary shortfall.
Advance on Universal Credit payment
If you are in receipt of UC, advances can be approved for certain purchases. Speak to an adviser at the JobCentre to see if your requirements fall within their categories.
Credit union
These not-for-profit organisations are typically community-based, either with people living in your area or working in the same profession, fostering a kindred spirit. Credit union loans are usually at affordable rates, but you need to be a member in the first place to apply, so it's worth joining if an appropriate one exists.
Family and friends
If someone close to you has sufficient spare funds, they may be willing to lend you the money, but this requires deep trust on both sides of the arrangement.
Selling unwanted items
Over time, most of us accumulate items about our homes that we no longer need or never even used in the first place. Providing items are in good condition and are clean, chances are there will be a market for whatever you have to sell, be it on an online platform or your local car boot sale. It brings money in and declutters your home at the same time.
Consider whether you really need to borrow the money
If you need access to funds to pay for essentials, then yes the money is necessary. However, if it's required for something that's a nice-to-have that ultimately isn't going to tangibly improve your life, then don't do it.
