Experts say the law surrounding logbook loans, which use vehicles as collateral, is in urgent need of reform to stop borrowers and buyers of secondhand cars being ripped off.
Legal experts have called on the government to address “archaic” laws which mean that buyers of secondhand cars risk losing their vehicles through no fault of their own.
This week the Law Commission, the body charged with ensuring legislation is fair and up to date, has asked ministers to change the rules surrounding logbook loans.
Sub-prime finance option
A logbook loan is a cash advance secured against the borrower’s car or other vehicle.
Typically, people who take out logbook loans have poor credit records. This is most often due to a history of missed repayments and/or debt defaults.
As a result, they find it difficult to obtain credit without offering an asset such as a car or property as security.
But logbook loans have frequently been criticised by consumer groups for being too expensive and unnecessarily risky.
Any borrower who misses repayments on such a loan could face losing their car.
But the Law Commission’s intervention relates also to what happens when someone sells a vehicle against which a logbook loan has been taken out.
In legal terms, even though a car appears to have changed hands legitimately, the new buyer could still have it repossessed by finance company if the seller defaults on their logbook loan.
In order to keep their car, the buyer might alternatively have no choice but to pay off the loan.
The Commission said this state of affairs was in urgent need of change.
Stephen Lewis, Law Commissioner for Commercial and Common Law, said: “Borrowers are increasingly turning to logbook loans, either as well as or instead of payday loans.
“They tend to be vulnerable, ‘sub-prime’ borrowers who struggle to access more traditional forms of lending. But the law in this area is out of step with hire-purchase legislation and offers little protection.
“Meanwhile, the law also fails private buyers who unwittingly buy secondhand vehicles subject to logbook loans.
“People buying secondhand vehicles understandably expect the law to protect them. But it is out of date and out of step with other consumer legislation.”
Recommendations for change
Lewis added that the current law regarding this form of finance was “archaic” and had not been amended “since Queen Victoria was on the throne”.
“It’s high time the law was reformed to bring protections to both logbook loan borrowers and the unwitting purchasers who, in all good faith, buy secondhand vehicles that are still subject to these widely used and unfair loans.”
The Commission has made three recommendations that it wants ministers to put on the statute books:
Firstly, borrowers should be given more time to settle their debts, and repossessions should only be permitted with a court order.
Secondly, borrowers should be allowed to end their loan agreement by simply handing their car back to the lender and face no further liability.
Finally, buyers of secondhand cars that have been used as collateral for logbook loans should not be liable for such loans provided they bought the vehicle in good faith, and were not aware of the outstanding finance.
Laws ‘not fit for purpose’
Peter Tutton, head of policy at StepChange Debt Charity, said that the proposals were a “positive step forward”.
“Legislation on logbook loans is over a century old and not fit for purpose, so it is good to see action being taken,” Tutton added.
“Logbook loans can cause significant harm and the current protections are wholly inadequate.”
However, he pointed out that the Law Commission’s recommendations meant that lenders would only be forced to obtain court orders prior to repossession if borrowers “opted in” to the court system following an initial warning from their finance company.
Tutton said: “If people have to actively opt in to receive protection from the courts against lenders repossessing their car, our evidence suggests it will not work.
“It requires too much proactivity and understanding from financially vulnerable people who may not even feel able to open their mail.”