In recent years two new loan products have become more and more popular in the United Kingdom - logbook loans and payday loans.
Both advances are short term in nature and don't require a credit history check to be approved. Both loans also charge a rate of interest on the loan amount that's somewhat higher than that offered by traditional financial institutions.
As such both products are also aimed at the same market - that is people who don't qualify to borrow from traditional institutions - usually because they've got a credit rating that's impaired.
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This is perhaps where the similarity between the two products ends. The two loans are dramatically different from each other in nature. The following is a comparison between the two:
Collateral used in the loan
When you borrow with a payday advance, the lender extends the amount to you against your next pay-check. This essentially means that you give the lender a post-dated check inclusive of the interest charged on the amount you've borrowed from the lender. The check is then cashed on your payday and your advance is cleared.
In the case of logbook loans, you borrow against a vehicle (can be a car, van or even a motorcycle) owned by you. The logbook loan requires your vehicle to be free or almost free of any prior financial finance. in good working condition and have proper insurance. The logbook loan also requires you to hand over only the logbook of your vehicle to the lender. You are allowed the use of your vehicle during the tenure of the loan. However, if you fail to repay the loan with in accordance with the agreement the lender can sell your vehicle in order to reclaim the loan amount.
Amount of loan
The amount extended by payday loans is often referred to as 'cash advances'. The amount you can avail through a payday loan is largely dependent on your pay-check. This makes the amount relatively small in nature. It's extremely difficult to borrow a significant amount of cash loan via payday loans.
The logbook loan lender has the capacity to extend a loan up to 75% of the value of the vehicle you own. Logbook loans can range anywhere between £500 and £50,000. The amount extended in a logbook advance is usually a combination of the worth of your vehicle and your estimated capacity to repay the loan.
Rate of Interest
The tenure of a payday advance is rarely more than thirty days. Because of the short term nature of this loan, the rate of interest charged on such a loan is designed to give the lender maximum benefit in the shortest amount of time. This means that as a borrower of a payday loan you realize that you are paying the lender a significantly larger amount than you borrowed owing to the high rate of interest charged.
The logbook loan has a rate of interest higher than that charged by traditional financial institutions. But when you compare the rate of interest charged by logbook loans to those charged by payday loans, logbook loans can charge a significantly lower rate of interest thus, saving you a lot of money you would otherwise end up paying as an interest on a payday loan.
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