Logbook loans, guarantor loans, “pay weekly” shops such as BrightHouse – these may sound attractive if you are short on cash but have a poor credit rating or have been refused a payday loan. But this sort of debt can end in disaster if you have money problems. This article looks at bad credit loans and what alternatives might work better for you.
From February 2017 I have been keeping a summary of recent news stories about these sorts of loans.
“Pay weekly” shops
Companies such as BrightHouse and Perfect Home advertise “affordable weekly payments” and no deposit as a simple way to buy household goods such as TVs, laptops or furniture. You may not think of these shops as selling expensive loans at all, but that is exactly what “pay weekly”, also called “rent to own” or “rent to buy” are – and they are used by over 400,000 people in Britain in 2016.
The shops emphasise the weekly payments which can sound small, not the total cost you end up paying:
- their price often includes delivery, installation, and very expensive insurance, whether you need them or not;
- interest rates between 65 and 95% are usually charged on top;
- the cheapest washing machine at Brighthouse could cost over £1,000 if someone paid weekly over three years. But a similar machine with similar service cover only costs £350 in a normal shop.
From April 2019, the regulator has brought in new rules that will mean that BrightHouse and similar shops can’t charge as much for some good as they have been doing. We don’t know how much difference that will make in practice to prices, and the interest rates and add on insurance and warranty charge will still be very high.
If you have a car, logbook loans may seem like an easy way to borrow money quickly, with no credit checks at all. But borrowing from Varooma, Carcashpoint, Mobile Money, Logbook Loans, Auto-Money, Loans2Go and other loans secured on your car can prove extremely expensive in practice, as the video in this news story illustrates. The interest rates are high and there can be a long list of extra charges which aren’t clear when you borrow the money – Citizens Advice have had clients who were charged £12 for making a payment on time!
Logbook loans aren’t normal bank loans at all – legally they are “Bills of Sale” – when you take one out you are actually selling your car to the lender. If you miss a payment, the lender can take your car without even going to court first. If you depend on your car to get to work or if you are disabled, this means you are in a very vulnerable position.
You can’t get help to set up an affordable monthly payment if things go wrong – with logbook loans you are trapped into the high payments or you will lose your car.
As a result, when someone can’t afford the high repayments they often feel they have no alternative but to borrow more from the logbook lender – these lenders helpfully deluge you with offers to extend your loan after you have repaid a few months. That then makes the problem worse. people can get trapped in this cycle for years. one reader has said:
I currently have a logbook loan with about 18 months left to pay off. I am up to date with the payments at present. I have rolled this over 4 times now and paid about £2500 in interest so far on a £1000 loan.
In summer 2017 the government announced it was introducing legislation to try to tackle some of these problems, but in May 2018 it dropped the proposed Bill, even though it had all-party support.
Guarantor loans are expanding rapidly as it becomes harder to get payday loans. Amigo is a major provider of guarantor loans in Britain, with extensive advertising on daytime TV aimed at people with poor credit ratings. Other lenders include George Blanco, Buddy Loans and Bamboo.
These guarantor lenders love to say how much lower their interest rates are than payday loans. But as Money Saving Expert Martin Lewis points out, “comparing yourself with the market’s dirtiest, doesn’t make you clean.”
If you borrow £3,000 at 49.9% for 5 years, you will be repaying an eye-watering £8,000. The cap on payday loans, so you can never pay more interest than you have borrowed, doesn’t apply to guarantor loans as they are over a year long.
A Citizens Advice report has the following example:
Basic affordability is a problem due to the combination of high-interest rates and a longer loan period. For example, one client came to us having taken out a loan for £5,000 and made payments at £197 month. After payments of £7,000, only £1,000 of loan capital had been repaid.
Payday loans justify their high rates because they are so short-term that they have high administration costs – that doesn’t apply to these guarantor loans. Guarantor lenders are effectively doing low-cost, low-risk lending but charging sky high-risk interest rates.
Many guarantors don’t understand what they are getting into and would struggle themselves with the repayments on these loans. Your parents may own a house, but their actual pension income may be low.
And often a guarantor doesn’t know just how bad the borrower’s situation is, so they don’t have enough information to make a properly informed decision.
I hope the FCA, who regulates these lenders, will change the regulations for guarantor loans to give guarantor’s extra information before they commit to such a big risk. But until that happens – if you are asked to be a guarantor, say No. If you really want to help a relative, you give them a loan yourself.
Guarantor loan lenders have been marketing themselves as a good way to rebuild a poor credit score – they aren’t – they are expensive and dangerous for your credit rating and your guarantor’s.
The worst part – these loans stop you getting help with your debts
If you have unsecured debts such as credit cards, bank loans or even payday loans, there are a lot of options for dealing with money problems.
- you could get a payment arrangement with a lender.
- or you could get a Debt Management Plan set up where the interest is frozen and you only make one payment a month.
- if just freezing interest isn’t enough, there are insolvency options such as bankruptcy, an IVA or a Debt Relief Order.
But none of the poor credit loans discussed here can easily be included in a payment arrangement, a DMP or in insolvency because the lender will simply repossess your car or furniture or go after your guarantor.
So you are trapped by these expensive debts. Which is of course what the lenders want.
These loans are being sold to people who have little spare money, often reliant on benefits, but those are exactly the sort of people find it hard to afford the high-interest charges. The quoted weekly or monthly payment may sound manageable to someone who is desperate, but it becomes a huge burden when it continues over a long period.
So these three sorts of loans make money difficulties both more likely and harder to resolve – a vicious circle.
Some people who have been getting refunds for unaffordable payday loans have been asking if they can also make this sort of complaint against logbook and guarantor loans.
The answer is yes… the regulator says a loan is affordable only if you can repay it on time without undue hardship or borrowing more. That rule applies to all these sorts of borrowing.
It’s easy with payday loans and Provident where you keep borrowing from the same lender again and again.
If you had a lot of BrightHouse loans or the repayments were very high for your income, you may be able to get a refund of the interest – use this BrightHouse refund template letter.
For logbook loans, car finance and large bad credit loans you need to be able to show that the loans were unaffordable for you AND that the lender should have known they were before they gave you the loan. Use the template letter in this article Asking for refund from large bad credit loans to make your complaint. Here is a Financial Ombudsman decision against Mobile Money and another against Loans 2 Go.
For guarantor loans, the lender should check that both the borrower and the guarantor can afford the repayments:
- if you have a guarantor loan, use the template letter here: How to complain about a guarantor loan. You must carry on paying while your complaint is being considered, otherwise the lender will go after your guarantor for the money.
- if you are the guarantor, you can complain before you are asked to pay anything to get your name removed from the loan, or later if you are being chased to make payments. See How guarantors can complain for details of how to do this.
These aren’t easy alternatives. But taking out one of the three types of loans described here may only seem easy for the first few months, then your life may well be harder.at the start and get very difficult later on.
If you already have a lot of debt, then borrowing more is not the answer, because interest on your current borrowing is already making your life very hard. Instead you need to look at your possible debt solutions and decide what will work for you. If you don’t think you have any solutions, talk to a debt adviser.
With little debt you may not have a good credit score because your credit record is just “thin”. Here one possibility is a credit union loan – see which you could join.
Or if you want to buy white goods or furniture look at Fair For You – a pay weekly online shop with a lot of major brand goods but they work on a not-for-profit basis and their total costs are often less than half what you would pay at BrightHouse.
When your income has fallen, then investigate whether there are any welfare benefits that you could claim. If your difficulty is just short-term, look at emergency budgeting ideas.