The dangers of the logbook and payday loans and why they are better to avoid
The logbook and payday loans have grown in importance and popularity over the past five years as loans from traditional lenders contracted.
If you have a bad credit history, your credit options are much more limited, and instant cash from the logbook or payday lender might seem like an attractive option. But both should be handled with extreme caution.
What is a logbook loan?
This is a loan secured against your car. Often times, loans are available for anyone owning a car and no credit check is done. They offer a percentage of the market value of your vehicle. This means almost immediate access to cash, but at a cost.
Similar to a pawnshop, the lender will keep important documents associated with the car, including the V5 (hence the name “logbook loans”).
You will then sign a credit agreement and a “bill of sale” which will give the temporary property to the lender. What this means is that if you can’t track your refunds, it will go up for auction. If the proceeds of the sale do not cover the value of the current loan, you will still need to make repayments.
Interest charges can go up to 400% APR.
What is a payday loan?
These loans are basically payday advances to cover short term cash flow problems. You take out a loan of up to around £ 1000 and within 28 days you will need to have it paid off. Cash is immediately available and no credit checks are performed.
The APR on these loans is often astronomical and seeing a representative APR of 1700% is not unusual. Lenders will argue that using the APR as a guide is unfair because these are short term loans.
But, they are still an expensive way to borrow money. Many lenders charge £ 25 for every £ 100 you borrow. This means that if you borrow £ 500 you will have to pay back £ 625.
Where these loans are particularly controversial is in how they encourage clients to carry over their balances to the next month … and more. All the time, interest charges go up.
have they been investigated?
High APRs and less than transparent processes caught the attention of the Office of Fair Trading. He is far from satisfied with the conduct of these types of lenders. In March 2013, the OFT announced that it was giving the top 50 payday lenders (representing 90% of the payday market) 12 weeks to change their business practices or risk losing their licenses.
He found evidence of widespread irresponsible lending and failure to meet the standards imposed on them.
At the same time, he announced that he was referring the payday loan market to the Competition Commission after finding evidence of deep-rooted issues in the way lenders compete with each other.
What did the OFT do?
The action was announced in the final report of the OFT’s £ 2 billion payday lending industry compliance review. The review identified issues throughout the payday loan lifecycle, from advertising to debt collection, and across the industry, including among major lenders who are members of established trade associations.
Specific areas of non-compliance included:
- lenders do not conduct adequate affordability assessments before lending or before renewing loans
- failing to adequately explain how payments will be collected
- use aggressive debt collection practices
- do not treat financially troubled borrowers with leniency.
OFT says payday loans are a top enforcement priority. Clients often have limited alternative sources of credit and are often in a vulnerable financial position. Combined with this, the high interest rates charged by many payday lenders can make the consequences of irresponsible lending particularly serious.
The OFT has also uncovered evidence suggesting that this market does not work well in other respects and that irresponsible lending in the industry may have its roots in the functioning of competition.
Lenders were found to compete by emphasizing speed and ease of access to loans rather than price and also rely too much on renewing or refinancing loans.
The OFT believes that these two factors distort lenders’ incentives to conduct appropriate affordability assessments, as this could risk losing clients to competitors.
Too many people are given loans that they cannot afford to repay, and it appears that payday lenders’ incomes are heavily dependent on clients failing to repay their original loan in full on time.
Although payday loans are described as short-term one-off loans, costing an average of £ 25 per £ 100 for 30 days, up to half of payday lenders’ income comes from loans that last longer and cost more. because they are rolled over or refinanced. . The OFT has also found that payday lenders do not compete with each other for this important source of income because at this point they have a captive market.
On March 19, 2013, the OFT withdrew the consumer credit license from MCO Capital Limited, a payday loan provider.
What are the alternatives to payday loans and logbook?
Many companies offering payday loans and logbook loans are actively marketing those that cannot obtain credit through conventional means. This means that the viable alternatives are slim on the ground.
Credit unions are one option. These are community-based, non-profit organizations that provide loans to their members, in the same way that building societies once served their local communities. They are much cheaper than payday loans and give a longer repayment period. APRs are generally between 20% and 30%
Other ways to avoid a payday loan include asking your employer for an advance, selling things you don’t need, and taking an authorized overdraft from your bank or mortgage company (although this should also be treated with caution as it can be costly).