According to the Office for National Statistics (ONS), as of January 2016 the average household debt stood at £11,800. This figure includes student loans but excludes mortgages, and it means a lot of us are in the red instead of the black.

Despite so many of us owing so much money (the ONS also reckons UK homes typically owe 26.5% of their annual income on loans and credit cards), borrowing money has never been cheaper. Take out a loan on the high street and you can enjoy interest rates of little more than 3%.

We recently brought you a blog on car finance options, but there was one that we deliberately omitted: the logbook loan. We excluded it for two reasons; firstly because we’re covering the topic in full here, and secondly because logbook loans should always be treated as a last resort.

The problem with taking the logbook loan route is that it’s a very expensive way of borrowing money, which is why those who decide to sign up almost always have a poor credit rating and are rarely home owners. As a result they can’t borrow money cheaply, via a loan that’s secured on a property.

As the name suggests, a logbook loan is secured on a vehicle, which means the lender can seize that vehicle until the loan is paid in full. Under the terms of the deal you can keep using the vehicle as long as you don’t default on the payments – but do so and the vehicle will be snatched back.

As a used car buyer you need to be especially careful that you don’t get duped into buying a car with a logbook loan against it. Do so and the lender will snatch the car back so you’ll lose everything. The key is to get an HPI check on any potential purchase, as this will flag up if the car has any finance owing on it.

How a logbook loan works

Just like any other loan, you can take out a logbook loan on the high street or there are plenty of online providers too. Offering loans of anywhere between £250 and £100,000, these lenders charge Annual Percentage Rates (APRs) of at least 100%, with 450% being far from unusual. When you consider that high street loans are available with APRs below 5%, your options have to be pretty narrow to sign up for one of these loans.

Repayment periods can be as little as three months (although at least six months is more common), while some lenders will let you pay back the debt over as much as five years. How much you’ll be able to borrow will depend on how much your car is worth – remember that’s what the loan is secured upon. Some lenders will let you borrow up to half of what your car will fetch, but the terms and conditions vary from one lender to another.

When you take on a logbook loan you’ll have to hand your registration document (V5C) over to the lender and you won’t get it back until the debt has been cleared. Default on the payments and your car will be seized so you’ll never get the V5C (or your car) back.

If you live in England, Wales or Northern Ireland you’ll have to sign a credit agreement and a bill of sale. By doing this you’re assigning temporary ownership of your car to the lender, but as long as you keep up the payments you can continue to drive it. Crucially though, the law recognises a bill of sale only if the lender registers it with the High Court. Should the lender fail to do so, the lender has to get a court’s approval to repossess your vehicle.

If you live in Scotland, bear in mind that bills of sale aren’t recognised, which means they can’t be used as security and they’re not legally binding.

As with any loan you need to read the small print very carefully, paying especially close attention to what the arrangement will cost you. A typical logbook loan has an APR of around 300%, so if you borrow just £1000 for 12 months, you’ll have to pay back £1960, at £163 each month. Take out the same loan on the high street and you could potentially cut these costs to as little as £1032 and £86; just half as much.

Other considerations

To be eligible for a logbook loan, the vehicle that you’re securing the debt against must have a current MoT and it must also be insured. Expect any lender to value your car; if it’s worthless you’re not really offering any collateral against which you can secure the debt. Some lenders have car age limits too, typically of 10 years.

Unsurprisingly, if your car already has finance owing on it you probably won’t be able to take out a logbook loan against it. However, if that existing agreement is coming to an end and you now owe very little, a lender may consider letting you take out a loan secured on it.

As with any loan that you want to take out, the lender will be looking for evidence that you’ve got a regular income. They’ll be less bothered about a poor credit rating than a mainstream lender, which is just as well because if you have a good credit rating you’re far better off going to a bank and borrowing the money from them.

Once you’ve signed an agreement, if you default the lender can send in the bailiffs to seize your car. They’re unlikely to do this straight away, but if you want to avoid the hassle and stress of a confrontation your best bet is to talk to the lender and work out a solution. Fail to do this and your car will be sold to repay the debt; if it realises less than you owe, you’re liable for the shortfall.

So before you sign up to a logbook loan, consider whether or not you really need the money. With the same sort of interest rates as a payday loan, by entering into such an agreement you could be heading for trouble rather than steering away from it.

Richard Dredge

May 2016