The downturn in the economy and the bank’s reluctance to lend to individuals has left many people with damaged credit files. This has led many people to seek alternative lenders offering credit to people with credit problems in the form of short-term loans, two of the most popular being logbook loans and payday loans.
These loans have risen in popularity predominantly over the past 5 or so years because applications are not subject to stringent credit checks and so have high acceptance rates for being approved a loan. There are some exceptions though. You will not be eligible for either if you are:
- In an IVA;
- In a Debt Management Plan.
Although these loans have very high interest rates they are available to almost everyone and so may be helpful if used as a short term solution to any financial problems you may be having.
So, if you are in the market for an alternative loan, are you better off taking out a payday loan or a logbook loan?
Payday and logbook loans each have their own distinct advantages and disadvantages which are discussed below.
The main advantage of both payday loans and logbook loans is their convenience and the speed at which they are processed. Most alternative lenders operate online and so decisions and payouts are generally processed instantly. Payday loans are probably the more accessible of the two as they are unsecured and so do not require any sort of collateral/security with which to secure the loan as with a logbook loan.
Logbook loans are strictly for vehicle owners and in order to be accepted, you need to own a vehicle and be in possession of the V5 Registration Certificate, also called the logbook. In addition to owning the vehicle, it must be free of finance and you must have a regular income each month to prove to the lender that you can afford the loan repayments. This is the lenders commitment to Responsible Lending and can usually be seen by their Consumer Credit Trade Association Membership details on their website. This is an encouraging sign that the lenders are being more mindful of their customers and ensuring that they do not get into unmanageable debts and risk their vehicles.
In the case of logbook loans, as the loan is secured against your vehicle you can often expect higher borrowing limits compared to payday loans. The amount that you can borrow is dependant upon the value of your car and so if your car is worth less than around £500 then a payday loan may be a better option as no logbook loan lenders will offer loans on vehicles of this value. However if you have a high value vehicle you could easily borrow in excess of £3000, and up to £50,000 in some cases, depending on your income and loan affordability. No payday lender will offer these loans values.
Although both products are convenient, one major disadvantage is that they have high annual percentage rates (APR) and so should never be considered as a long term solution to debt problems. As logbook loans are secured on your vehicle it could be recovered if you are unable to maintain the loan repayments. This could adversely impact on your life and work so you must proceed carefully and ensure you can afford the loan repayments before committing to the loan.
Payday loans differ from logbook loans in their repayments. Logbook loans are typically instalment loans whereas payday loans are often single payment loans. A logbook loan will typically be over 18, 24 or 36 months while a payday loan is a 1 month loan. It is often easier and more manageable to repay a small amount each week or month in the case of a logbook loan, rather than the whole amount plus interest in one payment in the case of a payday loan.
Overall, both logbook loans and payday loans are a useful product for anyone that has an urgent need for a short term loan, particularly anyone with a poor credit history and unable to borrow from their bank. It is important that you determine exactly how much you need to borrow and work out which loan is best for you. But remember, these loans are only short term and are likely to add to any long term debt problems if not used correctly.
Please see our Representative Example at the bottom of the page.