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.
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.
The good news is that cheaper alternatives are starting to appear. Some are set up by local charities working with the local council. Fair For You is 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.
UPDATE In October 2017 the regulator made BrightHouse offer refunds to customers – but many of these are very small. See BrightHouse – a template letter to ask for a refund for what to do if you don’t get one or you think it should be larger.
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 Georges 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. A Citizens Advice report has the following example:
Basic affordability is a problem due to the combination 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 at 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.
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.
A vicious circle
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, ranging from the temporary (a Debt Management Plan) to the very permanent (bankruptcy or a Debt Relief Order). But none of the poor credit loans discussed here can be included in a DMP. And although bankruptcy/DRO will extinguish your debt, the lender will simply repossess your car or furniture or go after your guarantor.
There is a vicious circle here. 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.
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’s rules about affordability (a loan is affordable only if you can repay it on time without undue hardship or borrowing more) apply to these sorts of borrowing. But it’s easier with payday loans where you keep borrowing from the same lender again and again.
To win this sort of complaint 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.
We have seen a few logbook loan cases won where the borrower had taken several loans and got a refund or reduction of the balance on the last one. Here is a decision against Mobile Money and another against Loans 2 Go.
For guarantor loans, the lender should check both the borrower and the guarantor can afford the repayments. If you complain about a guarantor loan you are still paying, you have to carry on paying while your complaint is being considered, otherwise the lender will go after your guarantor for the money.
These aren’t easy alternatives. But taking out one of the three types of loans described here may only seem easy at the start and get very difficult later on. Consider:
- 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 have much debt, then a good alternative to look into is a credit union – see which you could join. Or a “bad credit” card such as Vanquis – but be careful you don’t get sucked into more expensive debt.
- If 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.