Logbook loans are a comparatively new way of borrowing money, although the legislation they are based on is older. Unlike Payday Loans, another recently popular form of borrowing, they are actually secured, although on your car, unlike the more common security of house or property.
Being secured loans, their representative APR tends to be lower than that of a Payday Loan. Lower does not mean cheap though. The APR of an example payday loan can be over 4,000%; for a logbook loan it is likely to be over 400%, substantially higher than that of even an expensive credit card.
The popularity and advantage of these is, of course, the really high interest rates allow them to lend money to people with bad credit; a substantial number of people in the current economic climes.
The reason many people are taking out logbook and payday loans is they simply have no other avenues of borrowing money, as their credit restricts them from even the most expensive credit cards; a problem should something unexpected happen requiring an expenditure in order to resolve. Logbook loans are tempting because the interest rate is so much lower than payday loans.
Credit: eGDC, LtdWhen taking out a logbook loan, the owner must surrender the logbook, or V5 vehicle registration certificate to the lender, for the duration of the loan, although ownership is not transferred on the logbook itself unless the loan is defaulted on.
Although the UK Government did announce a consultation to ban logbook loans in December 2009, this was denied.
Victorian Bill of Sale Act
This act, even under its' last revision in 1891, predates the widespread use of cars by some time, and was never written to be used in the manner it is with logbook loans.
The bill of sale allows the vehicle owner to retain possession and use of the vehicle in question, although ownership is surrendered to the loan company for the duration of the loan, which helps explain its' attraction.
Most transactions are covered under the Consumer Credit Act, which means that the car cannot be seized without a court order. Transactions under this act aren't.
Why You Need to be Careful
In order to legally sell a car, the seller must have a V5 certificate to give to the new owner in order to complete the sale. This is where the problem arises.
Although a logbook loan requires the vehicle's owner to surrender the V5 document to the lender, because the car's ownership is not actually transferred to the lender unless the loan is defaulted on, a duplicate V5 can be obtained from the Driver and Vehicle Licensing Agency (DVLA) which handles such matters. If not checked up on, the transaction seems legitimate, as the car owner has the required documentation to prove the car is theirs.
Only temporary ownership of the vehicle is transferred under the bill of sale.
The Loan is Attached to the Car not the Owner
Credit: MorgueFileThis is a problem for the purchaser because the loan is attached to the car, not the borrower. Due to the terms of the legislation affecting logbook loans, should the loan be defaulted on, the lender can repossess the vehicle without a court order. The first you may know of it is when you get a letter, or someone turns up, and states that unless you pay off the outstanding loan on the vehicle, the vehicle will be taken away, leaving you in the position where you either lose the money you spent on the car, or having to pay out more money to keep it; possibly more money than the car is worth.
This check which can, and should, be made before purchasing any car, will show up any outstanding finance on a vehicle, as well as other factors such as clocking, whether it is stolen, whether the car has been written off or if it is cloned. HPI Checks do cost money to do, which is why so many people do not use them, especially for lower value cars.
There is a guarantee against problems arising with a car that has had an HPI Check, as long as you do a number of required tasks before purchasing the car, such as doing the check before purchase, not after, checking the V5, Vehicle Identification Number (VIN), Vehicle Registration Mark (VRM) and providing the details to HPI. A full list can be found on the HPI Check website.
It isn't guaranteed that an HPI Check will discover a logbook loan on a vehicle, due to it not being mandatory for lenders to register this type of loan, meaning some do not. The HPI Check does provide the best protection against this happening, as their comprehensive list of outstanding finance provides the best chance of detecting it and, in the event it isn't detected by the HP Check, the aforementioned guarantee, if the necessary steps were carried out before purchase, will apply, protecting your money.