There is always an alternative for people who need short term loans because money is always needed to be lent on a short term basis.
Even with the Financial Conduct Authority clamping down on Payday loans it just means that people will turn to other forms of finance such as short term logbook loans. There is no way that the government can just ban short term lending, they have just had to cut it back. What about the person moving house who needs a bridging loan, should they be penalised because lenders haven’t been acting as morally as they could in the past?
It’s not that logbook loans are going to be exempt from regulation anyway, they will be just as affected, but in the short term it seems that if former Payday customers need a loan and they have a car, this will be the way to go. It isn’t just logbook lending that will benefit, but also other forms of short term finance, even the one man lenders who fly under the radar and are completely unregulated will get more business. Ironically this is what the government are trying to move away from, but it will inevitably happen.
When the first round of regulation is finally finished across all short term lending sectors perhaps there will be so much decimation that only a few lenders will remain. The question now will be, is there enough competition in the market? At least with large numbers of lenders there is competition between them to gain customers because each customer on their books is valuable. In a saturated market, prices are competitive naturally. In a market with little competitiveness there is less incentive for lenders to offer market beating rates.
It all comes down to good marketing, it’s likely that the larger companies will survive as they have had the means to get through regulation fairly easily, and they have the largest marketing budgets to take the bulk of the customers. This is just a fact of stringent regulation and is almost inevitable.
Will consumers get a better deal?
The fact is that consumers wanting to take out short term loans probably won’t be better off in terms of choice, however they will be safer if they choose to be. By going to a regulated logbook lender or payday loan company they will know that company has been through a lot of scrutiny and will continue to be put through scrutiny. Fines can be very steep for lenders and so the incentives are there for them to follow the rules.
There will be caps on charges and no hidden costs when it comes to taking out a loan, everything will have to be open and upfront from the start. Customers will know what they are getting and there will be no ambiguity at all.
V5 lending probably won’t take over the market because it is under as much regulation as payday lending and could in turn suffer just as much as other types of short term finance.
Loans that were lent to people over a short period of time have always been a competitive market for lenders. The internet changed the game and just added to this competitiveness because the barrier to entry in the market was reduced. Anyone could set up a website and offer loans.
Easier market entry
One of the main issues with this was that because it was so easy to set up a website offering loans, anyone could pretty much start a site and start lending money. There wasn’t any real regulation that meant lenders had to adhere to a strict code. Yes there were industry bodies, but they were often regulated by the companies themselves, not an outside body. Something was needed that changed all this and meant that companies had strict rules to follow, or there would be severe consequences.
Luckily the Financial Conduct Authority (FCA) was brought in to regulate the market. Because of the exposure that payday loans has had in the media, the FCA had to act quickly and be seen to be taking a stand against rogue lenders. This has more or less worked and it has been predicted that there will only be four main payday companies left after all the regulations and fines have run their course.
Whether or not this is completely good for the consumer remains open to debate. Some say that more choice is better, but others argue that more choice just leads to lenders that are harder to enforce.
High interest rates
Loans that have extremely high interest rates will always be risky, and the fact that this type of loan is actually designed to go from payday to payday means it can easily be abused. Loan companies have enjoyed the fact that customers would never pay loans off. Before each payday customers would just take out a new loan and this would occur month after month. Most borrowers have low incomes and the loans just create debt they can’t get out of easily. If anything they are going to go further into debt and need other help to dig themselves out of the financial hole that payday loans have put them in.
Any product like this is always going to create a stir in the media because of all the negative sentiment around the loans. The negative publicity has in some ways meant that the government has had to do something about the situation quicker than they might otherwise have.
The news surrounding logbook loans isn’t always particularly good. The media regularly highlight the issues that customers face when their cars are repossessed or when someone buys a second hand car with a logbook loan against it without their knowledge.
These are all issues that come with logbook loans, but do they happen in every case? And are V5 loans always bad?
For all the bad press, it is only a small number of people who actually suffer these problems in comparison to the numbers who take out the loans. Nonetheless owners selling cars with a logbook loan attached to them is wrong, but should all the blame be put on the lenders? It is the individual who decides to be dishonest and pass the loan on to someone else, they are the people who should suffer the consequences, yes it is too easy for them to do, but they are the ones ultimately doing it.
No good news stories
It is hard to find anything onlne that has a good thing to say about loans against cars, apart from the providers websites. There are even campaigns against the loans. These campaigns do have a point and some regulation will have to be brought in to clamp down on people being able to move cars on with loans attached to them. However there are reputable lenders that are offering a service to people who need to raise cash fast and may often have no other alternative.
Regulation by the Financial Conduct Authority has meant that lenders are having to become far stricter than they ever have before. They are conducting detailed affordability checks and the hard selling tactics of previous years are no longer being used. The industry has cleaned up it’s act a lot and this will only continue.
Individuals do need to take some of the responsibility for the debt problems they have, the companies that offer loans can’t always be to blame.
Every year it seems that logbook loans are on the rise, more people are taking them out and logbook lenders are growing because of this increased demand.
This is partly due to the increase in numbers of people taking out short term loans in general, due to greater availability of them because of the internet, and also the campaigns that have been run by large brands.
The country has changed
Society and culture in the UK has changed over the last few years and it has become more common for people to buy things with credit than it has ever before. This has helped the economy in some ways as it has helped fuel growth amongst retailers, but it has also meant that the UK has mounting personal debt problems.
A body to oversee
The market for logbook loans had not been regulated at all before recently and so it was incredibly easy to take out a short term loan without needing much proof of income. That is changing and lenders are having to be stricter with how they check applicants and deal out loans. It isn’t as easy as it was, but figures show that demand is still high, in fact according to Citizens Advice it is set to rise by 61%.
One of the main reasons why logbook loans are so successful is that they give people with bad credit the chance to use possibly their biggest asset to raise funds. If they have a car that is under 10 years old and a good level of income that allows them to make monthly payments on a loan, then a V5 loan can be very useful.
Borrowers can raise cash fast against their car when they might not have been able to do otherwise because of their poor credit record and lack of being able to find a company that will lend them money.
Right or wrong?
Whether logbook loans are right or wrong really depends how you are looking at it. Someone taking out a loan because they need cash fast and have a credit record that isn’t great will probably think that logbook loans are very useful. Logbook lenders will obviously like logbook loans too. It is probably people who have been stung by large amounts of debt that will feel that the loans aren’t recommended because they have had a bad experience in the past.
It is just best to be careful when taking out any type of finance, especially if it is short term and has high interest rates. If you are careful, there may not be any problems and the money will be very useful.
There is plenty of help out there for debt problems as you can see in this video.
One of the most important pieces of advice when it comes to taking out a logbook loan is to choose a company that is open about it’s rates online.
Looking at this website for logbook loans they offer a useful calculator that enables customers to see how much it will cost to take out a logbook loan from them. As strange as it may seem, the are plenty of companies that aren’t upfront about their loan rates. They hide their interest rates behind APR figures that don’t actually stack up when a loan is taken out.
As we have mentioned before on this blog a number of times, if companies are to be regulated by the Financial Conduct Authority they will need to be open and honest on their websites about their rates otherwise they won’t be allowed to trade.
Some companies still seem to manage to get away with this although we think it won’t be long before it catches up with them. If they want to be authorised and continue working as a logbook loan provider they will need to follow the guidelines.
If a company isn’t open about it’s rates it is hard to know what else it isn’t transparent about. Is there a large fee if payment is defaulted on? How soon will they repossess people’s vehicles? Are there any administration costs? These are all valid questions to have because borrowers are often caught out by these extras.
Another question that arises is does a logbook loan need to be taken out at all? Sometimes they are not the best option, interest free credit cards can be far better value for money and more flexible. Once an interest free rate finishes the balance can be moved to another card. If monthly payments are met the loan capital will be repaid quite quickly.
For help when it comes to managing money the Money advice Service has a useful video you can see here.
When choosing a logbook loan one of the best methods is to look at the yearly interest rates for the loans that are fixed. Those rates offer the best insight into how much the loan will cost over the course of a year. It gives the person taking out the loan the knowledge that whatever happens, that is the price they will pay for the loan.
It is important to compare logbook loans providers over the same period of time, so for example if you are using a lenders annual interest rate, make sure that you are comparing over the same number of years with another lender. Figures could differ if you are comparing over a different number of years and could skew the numbers. Use a good calculator to make comparisons such as this one.
Some lenders have charges for defaulting on payment or for arranging a loan. It is important that anyone taking out a finance deal knows what any extra charges are upfront so they can add these to the overall cost of the cash. Lenders should be clear on their websites and in any material they publish what any extra charges are.
Most customers don’t think too much about what will happen if they can’t pay back their loan, they are more concerned with getting the cash as quickly as possible. Consumers need to be as responsible as lenders when it comes to loans because they will only find themselves in trouble and facing lots of debt otherwise.
Most debt problems come from taking too many loans out and not being able to pay them back because of the spiralling interest payments.
All short term loans have their uses and it is down to whoever takes out the loan to use it in the best way possible. This generally means to use the loan on a short term basis so it is paid off quickly, rather than keeping it for a long time.
Borrowers find themselves in trouble with short term loans because they use them for the wrong purposes. In today’s society there is a culture of having everything right now, more than there ever has been in the UK. People want goods and services straight away and don’t like to wait. This means that even if they don’t have the money for something they will go into debt to have it.
This is great for loan companies but it is not so good for borrowers because they often don’t think about the long term implications that getting into debt can have. Many investigations into short term lending find that borrowers use cash to pay for holidays or nights out when they really should be saving for these or not having them at all.
Be careful what a loan is used for
The problem with using a logbook loan for something like this is that is used one time and has no value after that. You can’t sell it to raise some money, it is not an asset and definitely not one that will make money. Borrowers need to understand that short term loans should only be used when they know they will be able to pay the money back quickly, otherwise debt will catch up with them.
Short term loans are sometimes useful if there is a shortfall in what you earn and have spent in a particular month, and it is a one off. The loan can be used to pay essential bills and then you will get back on track next month. Where this often goes wrong is when the gap between income and expenditure stays the same each month and a new loan is taken out frequently to make up for this. The borrower then ends up with lots of debt because they can never break even with their finances.
People should be educated about this at school and perhaps later in life too. The Money Advice Service does a great job of educating people about money and helping them budget each month. Without this kind of foundation it then falls to debt charities to deal with the issues rather than dealing with the root cause of the problem, which is lack of education.
What is the best way to use a loan?
There perhaps isn’t a perfect way to use a logbook loan because most borrowers situations are different, but in general it makes sense to use loans for less flippant purchases, rather than those which are used once and have no value again. There are people who take out logbook loans and other types of short term finance on a regular basis and manage their finances well, they make their payments and the loans work well for them. This doesn’t always work well for everyone so most lenders need to think carefully before choosing a loan.
Listen here to see what different people around the UK think about money.
One of the criticisms that has been levelled at loan companies has been that their rates haven’t been as easy to understand as they should be. When a customer is paying an interest rate that is in the hundreds of percent they need to be completely clear about the rate they are paying.
For anyone who wants to keep themselves clear of debt and we assume that is everyone, they need to know before they take out a loan how much they will be paying each month. It is no wonder that people dig themselves into holes with debt when the companies they are arranging the loan with aren’t upfront about the overall cost for the loan.
Compare different loans
Consumers who shop around will find a logbook loan comparison website such as Logbook Loan Advice useful because they give the actual cost for taking out the loan in a simple table. Sometimes it can be hard to find an actual figure when looking on a lenders website. This is something that is due to be looked at by the authorities so hopefully we won’t see this for much longer.
Lenders should be clearer
Lenders should clearly state on their websites how much a loan will cost using a yearly interest rate that is fixed. By doing it this way it is clear to see how much the cost will be over the course of the loan. When it comes to short term loans the interest rates can be so high that it’s not beyond reason that someone could be paying back more than they initially borrowed. If a customer were to understand this before they take out a loan they might well be put off, which of course is a bad thing for the company but could be good for the customers’ finances in the long term.
Is it too easy?
It can often be too simple to take out a loan without understanding all the implications. Because most V5 loan companies don’t credit check applicants it can seem like there is little risk for the customer, but this isn’t always true. The borrowers car can be repossessed quite easily if loan payments aren’t kept up. Sometimes a borrower might need the money fast and not realise that they are actually signing away ownership of their vehicle for the period of the loan. This means that the logbook loan company can take the vehicle whenever they want.
Of course there are good lenders who will give the borrower a reasonable amount of time to pay the loan, but some have been known to repossess a car very quickly after a loan payment has been defaulted.
The implications for someone’s personal finances can also be quite severe if the loan isn’t paid back quickly. A borrower can be saddled with a large loan payment each month which can cause pressure on their finances.
People can often feel under pressure to spend to keep up with friends. This clip from the Money Advice Service highlights just that problem, especially amongst young people.
Logbook loans and other forms of short term credit can seem to some as a way to quickly raise the cash to keep up with friends, but this isn’t the best way. It will only cause further problems when the loan can’t be paid back.
With the new regulation that is now in force in the logbook loans market there can be greater confidence amongst consumers that when they take out a loan they are working with a good company that has the right authorisation to trade.
In the past it was the lenders who had to police themselves and come up with a code of conduct that was agreed on by everyone in the industry. This was useful because it set out some interesting guidelines for lenders to follow and was a start but it has needed an outside regulator to come in and change things to make sure that everyone adheres to a strict set of rules imposed by an outside body.
The V5 loan industry has had too long where lenders have been able to get away with practices that were outdated and harmed the consumer. It has been well documented that lenders have been aggressive to borrowers who don’t pay back their loans on time and owe money. These are the lenders that will be weeded out by the Financial Conduct Authority. The fact that they were able to prosper and continue to trade, shows that outside help was needed in order to police the sector.
In hindsight it’s easy to say that the existing regulation that was in place wasn’t harsh enough, however it is true that something needed to be changed. In some cases Payday loans get classed in the same category as logbook loans and people have been campaigning for a long time for tougher regulation as this video from the Guardian shows.
Lenders do need to be careful however that they don’t flout existing laws such as the continued controversy over the repossession of vehicles from people who didn’t take out the original loan. There are lots of complaints to Citizens Advice due to the aggressive behaviour of companies, even though the person who is in possession of the car didn’t take the loan out originally.
Unfortunately at the moment the law hasn’t been changed to stop this happening, it is completely legal in the UK until the government looks into this more closely. A Bill of Sale is signed by the customer taking out the loan which gives the lender ownership of the vehicle until the loan is payed off. It doesn’t matter who the vehicle is passed on to, the lender still by law owns it.
The Citizens Advice Bureau has heavily criticised logbook loans companies because of their charges and aggressive behaviour towards borrowers who fail to meet payment deadlines.
It follows similar articles from Citizens Advice and new regulation of the industry which has gained more publicity because of it’s effects on the Payday loan market. It is no surprise that logbook lenders are under fire from Citizens Advice as they state they receive a large number of complaints from customers about V5 loans.
The Chief Executive of Citizens Advice Gillian Guy says that she is happy that the government and regulators have put Payday lending in the spotlight but that shouldn’t mean that other types of lending are overlooked. This looks unlikely to happen as the Financial Conduct Authority are looking into logbook lenders just as much as they are Payday lenders.
It was only yesterday that an advert by a logbook lender was banned by the Advertising Standards Authority for being misleading in the way it put across it’s APR numbers. Here is a video that explains how Citizens Advice works and how it can help you if you are in debt.
You can contact Citizens advice on 08454 04 05 06 for help or advice if you are suffering from financial difficulties.