What is a logbook loan and what are the alternatives to logbook loans?

As well as payday loans, overdrafts, credit cards, and other short-term forms of personal credit, you may have come across the term ‘logbook loan’. Borrowing money against the value of your car may sound interesting, but what exactly are logbook loans and are they ever worth considering?

Here, we take a look at logbook loans in detail and examine the alternatives to logbook loans, which may be more appropriate for your circumstances.

What are logbook loans?

Logbook loans are loans that are secured against a vehicle. Logbook loans are offered by FCA-regulated lenders, and involve borrowers handing over ownership of their vehicle to a lender until the loan is repaid. Therefore, taking out a logbook loan involves a high level of risk, which could see you losing your vehicle if you are unable to repay for any reason.

How much can your borrow with a logbook loan?

Logbook loan providers offer loans of various values, usually depending on the value of the vehicle you are offering as security. Some lenders may only lend around half of the value of your vehicle, but you could still stand to lose your vehicle in the event that you cannot repay, as they can force a sale to retrieve the money owed.

How do log book loans work?

When you take out a logbook loan you are handing over temporary ownership of your vehicle to the lender. You will often need to hand over the vehicle’s logbook or registration documents. Under the logbook loan model, the lender continues to allow you to use the vehicle providing you keep up with repayments as set out in your credit agreement.

As well as the credit agreement, when you take out a logbook loan you’ll have to sign a ‘bill of sale,’ which makes the lender the legal owner of the vehicle, enabling them to sell the vehicle as a result. This is providing they register the bill of sale with the courts.

When you take out your logbook loan, you’ll be given information pertaining to your loan agreement, including details of the repayments you need to make. Some logbook loans offer an interest-only repayment structure, with the actual loan amount not repayable until the final month of the loan term. Although this can seem like a tempting option, you’ll need to ensure you have the lump sum available to you to repay when the term is up, or you will stand to lose your vehicle.

How much do logbook loans cost?

Logbook loans can carry very high-interest rates and often also apply extra charges for things like paying out loans in cash. Repayments are usually spread over a period of up to 78 weeks, but you can repay early if you afford extra repayments. Lenders can also apply high charges and penalties if you can't afford to repay the loan or are late making payments.

Interest rates for logbook loans are often upwards of 400%, which means they are one of the most expensive forms of borrowing out there. In addition, there is not the same level of consumer protection afforded to payday loan customers, for example. Payday loans are closely regulated by the FCA and interest rates on these short-term loans are capped at 0.8% per day. If you take out a logbook loan, you can easily end up having to repay four times the amount you originally borrowed, and that’s even if you stick to your repayment schedule.

The FCA found that many logbook loan providers fail to carry out proper affordability checks, basing loan decisions only on the value of the vehicle being offered as security, as opposed to the borrowers’ ability to repay the loan. This can be problematic because owning a valuable car does not automatically mean a borrower has the money available to them to repay a loan.

What happens if you can’t repay your logbook loan?

If you default on your logbook loan and are unable to make repayments, the lender can sell your vehicle to cover the loan repayment. If they have failed to register the bill of sale with the court, they may still be able to force the sale of your vehicle by applying through the courts to repossess your vehicle.

There have been some reports of logbook loan providers using intimidation tactics on borrowers who have failed to repay their loans. This, and other unscrupulous and irresponsible lending practices came to the attention of the FCA back in 2016, when it carried out consumer research into the industry. The FCA has pledged that it will not register lenders who do not fulfil FCA lending requirements when offering logbook loans. This gives consumers some protection from illegal lending practices providing they always make sure a lender is FCA-registered

What are the alternatives to logbook loans?

If you were considering a logbook loan, think again. These loans are notoriously expensive and risky. Putting your vehicle up as security for a loan means you can lose one of your most valuable assets simply by defaulting on a payment or two.

For those who do decide to take out a logbook loan, they aren’t as easy to come by as you might think. First of all, you need to own a vehicle outright, with no outstanding finance on it. The vehicle also needs to be worth at least £500, or the lender won't usually consider it enough of an asset. Some credit checks and employment status checks may also be carried out, so if you’re unemployed or self-employed, you may not be eligible for a logbook loan, even when you offer your vehicle as security.

So what are the alternatives to logbook loans? A number of more sensible options exist for people who need access to money to tide them over. Here are some suggestions - but remember, these won't be suitable for everyone and most of these options will come with eligibility criteria that you may, or may not meet.

• Short-term unsecured loans, such as payday loans and Instalment loans
• Overdrafts
• Credit cards
• Loans secured against your property/homeowner loans
• Vehicle finance
• Longer-term unsecured personal loans
• Store cards
• Online purchase credit, such as Paypal credit and Klarna
• Loans from family or friends

Taking out any kind of credit comes with risks and it’s vital that you think carefully about whether you can afford to repay the amount you have borrowed, plus any interest that will be applied to the loan, together with any fees or charges. Then consider penalties that can be applied if you miss a payment or payments. Look at what you stand to lose if you can’t afford to pay, as this can happen to anyone at any time.

Building assets is an important part of financial health. Risking those assets to borrow cash is rarely a good idea.