You may have heard of a secured loan before. This is a type of loan that’s secured against something you own – typically your home. Effectively, you’re saying: “If I can’t repay what I borrow, you can sell this to make the money back.”
But your home isn’t the only thing you can secure a loan against - you can also secure a loan against your car (or vehicle). This is what happens with a logbook loan.
The lender owns your vehicle until you repay what you borrowed against it.
A bill of sale against your vehicle
The technical name for a logbook loan is a bill of sale. They’re sold online and on the high street, including at car dealerships.
Just how much you’re able to borrow depends on what your vehicle is worth. Generally speaking, the more it’s worth, the more you’re able to borrow against it. You must be the legal owner of the vehicle, and it does have to be worth more than £500 to borrow anything against it, though.
This type of lending is commonly referred to as a logbook loan because you have to hand over your vehicle registration document – also known as your vehicle’s logbook – when you take the loan out.
However, as this kind of loan is attached to the vehicle and because the industry is not as heavily regulated as other types of lending, there have been well-known instances of people selling the car with the loan still attached.
This causes issues if someone buys the car without knowing there is finance attached to it. The lender may come to repossess the car, and, legally, you can’t do anything about it.
That’s why it’s vital to ask to see the logbook of any car you’re buying. If the seller can’t provide it, or you suspect it’s not the real deal, walk away from the sale.
The problem with logbook loans
The other main issue with logbook loans is that there’s a bit of a grey area in the laws surrounding them.
For starters, if you fall behind on a few payments, the lender doesn’t even have to go to court to legally reclaim your vehicle. Once they’ve sold it, if they’ve not made all the cash back, you can be taken to court for the rest of the money.
Not only this, but the loans usually have very high APRs, and they’re a very expensive way to borrow. This means you can quickly end up repaying far more than what you borrowed in the first place.
As the law around these types of loans is a bit foggy, there are a few rogue lenders out there and there’s very little consumer protection if you do run into trouble repaying.
Be aware of what you’re signing up to
It’s absolutely vital you read through the terms of the agreement before you sign anything. Logbook loans can be very risky, but if you have decided to borrow this way, you must familiarise yourself with the terms and how much you’ll have to repay each month.
Some agreements are complicated in that you make smaller repayments (usually just for the loan interest) until the last month, when you’re expected to repay the amount you borrowed initially in one go.
If you’re able to without being charged, aim to repay what you’ve borrowed as fast as you can. The interest is calculated weekly, and racks up quickly. The sooner you pay the loan back, the better.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.