High cost loans, such as logbook loans, can force people into debt.

For some, high cost loans, like logbook loans, can be the only option.

Over the last couple of years the UK has experienced a rise in borrowing amongst households. For many consumers this has been their only option for paying for everyday essentials and bills.

The worrying fact is that many of these households have to turn to high cost credit loans to make ends meet. The so called ‘payday’ lenders.

These types of high cost loans typically charge huge interest rates. A surge in different types of loans can tell stories that give us the insight in how households are coping.

There are basically, 4 main types of loan categories in the UK that are the most revealing. 

 The first is Mortgages. Since 2014, the mortgage debt has been steadily increasing. By the end of 2017 it was  estimated to be more than £1.33 trillion. One of the reasons for this, is the encouragement from the government’s Help to Buy scheme which subsidies the deposits of first time home buyers. However, critics say that the scheme pushed people who otherwise won’t even consider buying a home to be in debt.

 Student loans have shot up since the introduction of increased student fees.  Student debt, according to the government now stands at £105 billion up to the end of last March.

The draw behind going to University being that graduates should expect better opportunities to enter the workforce and elevated amounts of pay.

A recent report suggested that only 5% of graduates remained unemployed after 6 months. 74% of professionals who enter the workforce are full time first degree graduates.

The figures also suggest that men benefit more than woman from a degree. A male graduate can expect to earn around £24,000 pa on entering work.

Car finance Loans have also ballooned over the last few years. In September last year a report recorded car loan debt for 2016 was approximately double that recorded in 2011.

The main reason for this could be the ease with which car loans can be transacted. The report said’- “Seemingly cheap financing deals offer the opportunity to drive away a brand new car less than two weeks from signing on the dotted line. There can be little or no deposit, while monthly payments from as little as £100 can stretch the bill over a two- to four-year period.”

 Unsecured loans. Finally, the biggest amount of debt lies in unsecured loans.  With unsecured debt now reaching levels not seen since 2010,  by the end of last year, the amount of unsecured debt reached over £201 billion.

Uncertainty over economy and Brexit contributes to rise.

Some economists say that the failure of the government to meet economic targets and the uncertainty brought about by the Brexit vote contributed to the rise .

Unsecured debt is typically, credit cards and personal loans.  Car finance is often classed as unsecured debt, although your car could be repossessed if you do not keep up the payments.

About logbook loans.

A logbook loan is a good example. This is when a you borrow money against your car.

Borrowers surrender the car’s logbook upon the securement of the loan. At that moment, the lender technically becomes the owner of the vehicle. The borrower continues to use the car just as long as they are able to keep up with the repayments.

How much does a logbook loan cost?

Logbook loans are similar to payday loans in that the lender can and often does charge huge interest rates.

For instance, one logbook lender clearly sets out its terms on its website as follows: –

If you borrow 

£850 over 18 months at a flat rate of 132% per annum (fixed) with a representative 450.5% APR

You will owe.

17 monthly payments of £140.72 and 1payment of £140.76, repaying £2,533.00 in total.

Money Advice Trust use the example below”-

Typical Annual Percentage Rates (APRs) are 400% or higher, so this is an expensive form of credit.

For example, if you borrowed £1,500 and paid £55 a week for 78 weeks, you would repay over £4,250 in total.

That means you would have paid over £2,750 in interest in order to borrow £1,500

 Serious issues over ownership.

There have also been some serious issues with logbook loans.  Establishing the ownership of the car can be a problem. One such case was a purchaser of a second-hand car.  He bought the car for £1000, he did do checks on the car via an internet car search site for £3.  Nothing flagged up, so he bought the car.  Within weeks he started to receive letters from a logbook lender claiming ownership of the car. They were going to send bailiffs round to retrieve it.

Unbeknown to the buyer is that the person they bought the car from may have taken out a loan against the value of the car and is still paying it back. They now find yourself in possession of a new car and a debt they’re responsible for.

Bills of sale, where people take out loans against items they own whilst still keeping them, have grown significantly in the past 15 years or so. Going from 3,000 in 2001 to over 37,500 in 2015. The vast majority of these, approximately 90%, are against cars.  Known as logbook loans, a legal loophole allows any money left unpaid to be transferred onto the new owner. This can potentially lead to the vehicle being repossessed.

New proposals set to change law on logbook loans.

The new proposed legislation was set to change all of this. Following recommendations by the Law Commission in September 2016, Economic Secretary to the Treasury Simon Kirby confirmed planned changes to the law to protect both buyers and borrowers. The protection offered would be similar to those offered by hire-purchase law. The proposed changes were included in the Queen’s Speech in 2017.

Stephen Lewis, Law Commissioner for Commercial and Common Law, said: –

“This is great news for car-buyers. Every year many were unwittingly purchasing second hand-vehicles at risk of repossession due to unfair logbook loans. The current law doesn’t give them the protection they deserve and our recommendations for changes are about putting people back in the driving seat when it comes to logbook loans. I’m pleased that the Treasury has agreed and acted swiftly to put the brake on this out of date legislation. We’re drafting a bill which we hope will be introduced into Parliament next autumn to change the law by 2019.”

However in May of this year, 2018, an article appeared in the Law Society’s Gazette which said the government has announced that it will not proceed with a bill that would have provided more time for vulnerable people taking out ‘logbook loans’ to seek debt advice and avoid paying hundreds of pounds in court fees. The Law Commission, which drafted the Goods Mortgages Bill, said the news was ‘disappointing’.

Where that leaves the changes to legislation surrounding logbook loans is unclear.

Short term high interest borrowing increases debt levels.

The idea of payday loans is for short term borrowing. That consumers would typically borrow to top up their finances in between pay days.  But with the amounts charged to borrow many find themselves falling further and further behind and consequently accumulating more and more debt.

Figures also shows that it is often young people using payday loans, particularly those who fall within the 25-30 range.

Getting help with debt problems is ‘vital.’

Finding  a good debt advisor is often a relief.  At Ramsey Lomax we have years of experience in helping people.  One thing to remember is that your chat with our advisors is completely confidential, free and without obligation. For many of our clients just getting if off their chests and having a sympathetic ear to talk to can make all the difference. At Ramsey Lomax we understand ‘financial fear’ and we have helped 1000’s of people towards a debt free future.

Ramsey Lomax are fully authorised and regulated by the FCA, the Financial Conduct Authority. So you can rest assured of our professionalism.  We also make things easier than ever before with up to date communication technology.  To make it as simple as possible for you to become debt free.

Taking that first step is not always easy but is a crucial step towards helping you to find financial freedom.

Read more about Ramsey Lomax here

Contact Ramsey Lomax here.