Finding the right loan for you is difficult, especially with so many different options on the market. To help you out, we've taken a look at two of the most popular forms: logbook loans and payday loans. For both we have broken down what they are, what you get and the pros and cons, highlighting the difference for you.
What Are Logbook Loans?
Lenders who provide logbook loans lend you money that is secured against your vehicle. This means that, whilst you are making your repayments, the lender essentially owns your vehicle. You can, however, keep using your vehicle during this time - as long as you repay the loan.
It's relatively easy to get a logbook loan, and they are usually available to get on the internet and the high street. However, as with a lot of loans, they do carry an element of risk and are relatively expensive.
You can read more about logbook loans here:
How Do Logbook Loans Work?
In exchange for the loan, you are normally expected to give the lender your logbook or vehicle registration document. This is proof that you are the registered owner of the vehicle. Whether you hand this over or not, you are still handing ownership of your vehicle over to the lender, until your loan has been repaid in whole.
On top of signing a credit agreement with the lender, you will also be expected to complete a Bill of Sale separately. This form confirms that the lender is temporarily the owner of the vehicle whilst you are in debt to them. The Bill of Sale is only valid if the lender has legally registered it, giving you some security during the repayment process.
The majority of logbook loan repayments are required to be completed over a period of 78 weeks, however, you're able to pay it off earlier, should you want to and can afford to.
How Much Does a Logbook Loan Cost?
The average APR (Annual Percentage Rate) for a logbook loan is 400% or higher, making it an expensive form of loan.
Here's an example of how a logbook loan would work:
- You borrow £1,500 in total from the lender
- You pay £55 a week over the course of 78 weeks
- The total amount you pay to the lender is £4,250
- This means you will pay more than £2,750 in interest, on top of repaying the original loan amount.
Pros and Cons of Logbook Loans
|You can borrow anywhere between £500 and||They are not available in Scotland|
|Available on the internet and high street, so easily accessible||The amount you can borrow is restricted by the value of your vehicle|
|You are allowed to complete repayment early, should you wish||Some lenders will only give you half the value of your car|
|The loan is typically paid directly into your bank account||With APRs as high as 400%, the loan is expensive|
|There are certain legal requirements for the lender to take temporary ownership of your vehicle, giving you some security||If you fail to repay the loan, you lose your vehicle|
|It is possible to take advantage of a quick cash service, if you need the money urgently||To confirm your Bill of Sale is registered, you are required to pay an additional fee|
|You may only have to pay the interest whilst you are paying the original loan amount|
What Are Payday Loans?
Payday loans are designed to make ends meet for the borrower until their payday. They can be used to accommodate unexpected costs that occur, which haven't been budgetedin that month. Unlike many traditional personal loans, payday loans are intended to be short-term loans. Repayment is done when you are paid your monthly salary.
How Do Payday Loans Work?
Payday loans are most commonly available online, although there is the option to speak with their customer services team over the phone or by email.
The money is paid directly into your bank account, and there is usually a short turnaround time from application to receipt of the money. At the end of the month you are expected to repay the amount, as well as the interest and any other additional charges.
Payday loan repayment is typically completed over a period of one to three months, with the repayment done in instalments. However, it is becoming increasingly more common that you can borrow the money over a longer period of time.
Many lenders will expect you to set up a direct debit for the repayment process, which is also known as a Continuous Payment Authority (CPA). this allows them to take the money you owe them directly from your bank account on the agreed repayment date.
What all kinds of payday loans have in common is that they only offer small amounts of money, are never long-term and are expensive.
How Much Does a PayDay Loan Cost?
The APR for a payday loan can be anywhere from 1,500% and up. Even though the amount of interest and fees you can also be charged have been capped by the Financial Conduct Authority, this is still a very high interest rate.
Here's an example of a payday loan would work:
- You borrow £300 over the course of one month, with an APR of 1,500%
- The initial interest you will be required to pay is £77.98
- At the end of the month, you repay the £300 and the £77.98 - a total amount of £377.98
- If you pay 30 days late, you will incur an additional interest fee (£77.98), a late fee (£15) and interest on the fee (£3.60) - a total amount of £474.56
The later you make the repayment, the high the interest will be. You will also have to pay additional late fees and fee interest, which can result in the repayment spiralling out of control.
There is an overall cap process in place, which means will never pay back more than double the amount you initially borrowed.
Pros and Cons of Payday Loans
|They have a quick turnaround time from application to receipt of the loan, so are useful when you need cash urgently||Most lenders insist that you set up a direct debit for repayment, which can cause issues if you don't have enough money in your account or forget to cancel it after repayment is complete|
|There is a cap on the amount you can be charged during repayment||With a minimum APR of 1,500%, payday loans are expensive|
|They are quick and easy to apply for online||Payday loans usually end up costing more to use than a credit card|
|They are monitored by the FCA, giving you some security||Payday loans can affect your ability to get a mortgage|
|If you don't have enough money in your account during the repayment process, you will also be subject to bank charges|
Things to Consider
For any kind of personal loan to take out, you should consider the following before signing up:
- Will you be able to make the repayments on time?
- Will you have sufficient finances to repay the loan?
- Is this the best loan option for you?
- Do you know what the total repayment amount will be, including extra fees and charges?
- Can you find the finance you need, without taking out the loan?
- Are you frequently taking out loans? (This is a sign that you should consider reaching out for help)