Why aren’t logbook loans regulated like payday loans? Quick Loans Express explores why logbook loans have escaped regulations and the change that is to happen.
A brief overview of the UK logbook lending market
Logbook Loans and the Logbook Lending Market
Before we consider why more isn’t being done to protect consumers who make use of logbook loans, let’s briefly give an overview of the logbook lending market. We’ll then go on to explain how logbook lending works. Then explain the limitations of the existing legislation and what changes are in the pipeline. Finally, we ask: why hasn’t the FCA stepped in to protect logbook borrowers as they did for people taking out instant payday loans?
A Brief Overview of the UK Logbook Lending Market
In comparison to the payday loan industry, logbook lending has a relatively small turnover. In 2016, an estimated 60,000 such loans were taken out in the UK and the industry is worth £60-£75 million. Although the amount borrowed depends on the value of the vehicle which is being put up as security, the average loan is £1,000 (but won’t be more than half than the vehicle’s resell value). Also, the repayment period is usually spread over 12-18 months.
FCA research in July 2017 found that the median age for those taking out cash loans was 38; their outstanding personal debt was £7,600 spread over seven different financial products, and their median annual income was £23,300. These statistics would seem to suggest that logbook loans tend to be a loan of last resort for consumers already struggling with other debts.
The average APR for logbook loans is around 190% although it can reach 400% for some companies or if the borrower defaults on any of their repayments. Like payday loans and credit cards, it is one of the most expensive kinds of consumer credit.
How Logbook Loans Works
Through bill of sale lending, the car-owner transfers ownership of the vehicle until the loan has been repaid in full. Often they are requested to hand over the V5 logbook as well as other documents for the vehicle. The borrower can continue to use the vehicle despite the transfer of ownership.
Are Logbook Loans Unregulated?
It’s slightly misleading to say that nothing regulates logbook loans and lending. Before receiving the loan, borrowers have to sign a personal loan agreement (which comes under the terms of the Consumer Credit Act). The second document, the bill of sale, comes under the regulations of the 1878 and 1882 Bills of Sale Acts. This is where the problem lies for consumers who take out a logbook loan.
Legislation written for the different conditions of Victorian Britain isn’t necessarily adequate to reflect the realities of what’s now happening. In the past, people used bills of sales to raise capital on belongings like jewellery, paintings or antiques. Existing legislation isn’t really suitable for the realities of securing a loan on your main form of transport. This is especially as lenders can repossess it at any time without a court order if borrowers default.
Changes to 19th Century Logbook Regulation
Citizens Advice has been running a campaign calling for changes in the legislation governing logbook lending since 2014. They have said that the way that the system works means that there’s no incentive for lenders to negotiate affordable repayment plans for those in financial distress.
Following recommendations from the Law Commission in September 2016, the Treasury has agreed to act to close these loopholes in the legislation. Announced in the Queen’s speech in June 2017, the Goods Mortgages Bill will give more protection to consumers and will replace these antiquated Bills of Sales Acts. What are the reforms which will come into effect from 2019?
Reforms in Logbook Loan Legislation
The main points of the new legislation:
- Lenders will have to get a court order before repossessing a vehicle
- Forbearance must be shown to borrowers who are temporarily unable to pay but have paid off at least a third of the loan
- Borrowers would be able to end the agreement early by handing over their vehicle to the lender
- The legislation will protect buyers who bought a second-hand car in good faith with an outstanding loan; while the seller could be prosecuted for fraud
The Role of the FCA in Regulating Logbook Lenders
You may perhaps be wondering where the FCA is seeing as it’s their role to oversee and regulate consumer credit.
In their Feedback Statement on High-Cost Credit (FS 17/2) published in July 2017, the FCA said that they weren’t proposing to do any further policy work on logbook lending at that time.
Part of the reason was the low level of complaints they’d received compared to other kinds of high-cost consumer credit. The other reason was that they felt no further measures would be necessary since the Law Commission study would soon become law. Therefore, the FCA assumed that the legislative reform would address many of the problems making their intervention unnecessary.
Once the Goods Mortgage Bill becomes law in 2019, many of the abuses present in the logbook lending market will become a thing of the past. If there continue to be problems with consumers being mistreated or misled despite legislation, then it will be time for the FCA to intervene and impose further legislation to protect them.