Why Car Equity Release is better than a Logbook Loan?
22.10.2019 by Jack H
Logbook loans are a high-risk way to get fast cash when you need it. Outdated legal frameworks make them a dangerous option for those struggling with finances. Car equity loans are an alternative option that could ease the financial strain while delivering lower interest rates and easier repayment methods.
What is a car equity loan?
Designed in a similar way to home equity loans, a well-structured car equity loan is one where your vehicle is used as a form of collateral. These short-term loans can be useful as they are a quick method for getting access to money when you need it. Alternative loan types come with high-interest rates and strict repayment periods, and that can always be a risk. Car equity loans have been growing in popularity because they tend to come with much lower interest rates, and have much longer repayment terms, making them easier to pay off.
What is a logbook loan?
This is a type of loan that is secured against your vehicle. It’s a similar design structure as a mortgage. However, they are ridiculously outdated. Based on laws that were drawn up in the Victorian era, logbook loans have little to no protection for those that use them. While they have been used for years to let people gain access to a short-term credit stream, they come with some significant risks that should be a red flag for anyone considering taking out any form of short-term loan.
Why are logbook loans high-risk?
When you take out a logbook loan, the amount that you are allowed to borrow is dependant on the trade value of your vehicle. Usually, it is an amount not under £500 and not over £50,000. The majority of logbook loans will agree on an amount that is around 50% of the vehicle’s trade valuation. The main reason why logbook loans have become such a risky loan option to consider is that when the debt is agreed to and secured, you have to give the lender your vehicle’s logbook or registration document. You will also have to sign a ‘bill of sale.’ That means that although you will still be able to use the car, it does not technically belong to you anymore. It belongs to the lender. And that’s not all. Other risks associated with logbook loans include:
- High-interest rates: You can always expect to see the interest that you pay on a logbook loan to be much higher than many of the alternatives. The logbook APR (annual percentage rate) will usually start at 400%, but can go even higher than this. That means vehicle owners who take out a logbook loan of £1500 with a repayment duration of 78 weeks (which is about standard), will have paid out a total amount of over £4250. So in order to get your hands on some fast cash, you agree to pay an additional £2750 worth of interest. And don’t think that paying back your logbook loan early is going to save you from those whopping interest rates. Most logbook loan companies will charge you an extra fee or some form of early repayment charge.
- Repossession: Although the high interests are the main concern when people look at taking out a logbook loan, one factor is often overlooked. If you happen to be in a situation where you fall behind on your repayments, then there’s a good chance that you will lose your vehicle. The bill of sale that you sign when taking out a logbook loan means that the lender then owns the car from a legal standpoint. The lender will repossess your car and then sell it on to recoup their losses. How quickly the lender resorts to this stage of defaulted repayments will depend on the company, but it usually takes missing more than six or seven of your repayment deadlines.
There will be additional costs usually tacked on at this stage. If your logbook loan provider has to phone you or post letters to you then you will be charged for those as well. Other costs will include the price charged by the repossession agency that collects your car. If you’re already struggling to pay back your logbook loan, these additional charges can make it impossible, and that means never getting your car back.
- Hostile Reputations: Although there are professional logbook loan lenders, there has been a never-ending stream of complaints from borrowers who have been exposed to shady and questionable debt recovery tactics. Phone and letter harassment is common, as are aggressive repossession agents, and there are even loan conditions that allow debt collectors to have access to your property so that they can take equivalent value possessions.
- Buying a car: One aspect of logbook loans that is often overlooked is the danger that they can cause for people who are buying a car. If you take out a logbook loan and decide to sell your car to help make repayments, then the person that buys your vehicle will not actually have ownership. The logbook is not in your possession and the car legally belongs to the loan provider. This can lead to the new buyer getting stung by loan debts that they have never taken out. The only way to avoid this risk if you are buying a car is to take out a full HPI check.
In times where there were no practical alternatives to logbook loans, they became a standard method for getting some quick cash. However, as new legal propositions failed to update the regulatory setup of logbook loans, they remain high-risk, low-value, and can put you and your property at risk.
Logbook Loan Alternatives
A logbook loan is remarkably easy to get. They are usually agreed to without any kind of credit check, which makes them very appealing to many people. For those that have been refused a more positive loan package, logbook loans used to be the only option, despite the risks.
What is an auto equity loan?
Growing in popularity, auto equity loans are a type of secured loan. They are a way to let people borrow money based on the value of their car. This can be done for those people that own their vehicles outright or even for those that have some equity tied up in their car. The borrowing amounts for auto equity loans will vary, and depend on some key factors, including:
- The equity amount that you have in your vehicle
- The market value of your car
- Your regular income
- Your credit score
For most car owners, their vehicle is their first or second most expensive asset. Car equity release schemes let borrowers have access to cash amounts that are otherwise tied up in the value of their car. Auto equity loans are very similar to a mortgage, where instead of your home acting as collateral on your loan, you use your vehicle instead. The rise of auto equity loans has given those people who would otherwise have to resort to dangerous logbook loans an alternative option.
Benefits of Auto Equity Loans
When you apply for an auto equity loan, the process can be remarkably fast. In most cases, you simply need to fill out an online application form. This will mean providing details about you, your car, its value, and your levels of equity. If you are approved for the amount that you want to borrow, then that cash is usually in your bank account on the same day. However, speed isn't the only benefit of an auto equity loan. They also come with:
- Easy qualification: If you have a poor credit score, then you may be tempted to apply for a logbook loan. This is a mistake, as auto equity loan providers are looking primarily at your vehicle and its value. You will be using your car as collateral, so credit scores might not play as large a part in determining your chances of loan approval as you think. If your credit score is low, then lenders will often use this to determine how much to lend you.
- Car ownership: While logbook loans will require you to own your vehicle outright, auto equity loans work very differently. Even if you do not yet own the vehicle 100%, you will still be eligible for an auto equity loan. You will also not need to hand over your logbook or sign a bill of sale. You get to borrow money based on the value of your vehicle while still being able to use it. For people that use their vehicles for work, this can be a major stress relief.
- Repayment terms: There are many risky loan types available for those that are desperate for some quick cash. Auto equity loans offer a much safer set of terms and are usually designed with much longer repayment times. Longer terms for repayment can make the money that you pay back much easier to manage thanks to smaller amounts over a longer period of time. This makes it far less likely that you will default on the loan and risk losing your car as a result. Of course, those longer payment terms will come with interest, but when some payday loans and logbook loans are so prohibitive in their interest levels, auto equity loans are a much more manageable level.
Financial mishaps can happen at any time. When you need access to some fast finances, there are options available to you. However, many of those options, including logbook loans, are inherently high-risk and rife with bad practises and even worse reputations. If you need money fast, you have a vehicle, and you want less risk, then auto equity loans are currently the safest and most cost-effective way to get your hands on emergency funds without putting your future finances at risk.