What are Logbook Loans?
Logbook Loans are an old fashioned 19th Century type of Loan based on two Victorian acts of law that do not do well to protect the consumer. Over the last 15 years, there has been a significant growth throughout the United Kingdom of people using their vehicle as security for obtaining short-term credit, often referred to as a ‘Logbook Loan’.
In England, Wales and Northern Ireland, a Logbook Loan comprises of a Bill of Sale agreement and Consumer Credit agreement securing the loan on the vehicle, whilst allowing the Borrower to retain full use. However, you have to surrender your V5C logbook and often the spare key.
Upon signing both agreements, the ownership of the vehicle is transferred to the lender. Only when the last payment is made to settle the debt will the ownership of the car reverts back to the lender. In addition, a Bill of Sale allows the Lender to repossess a vehicle with upon two defaults, with little protection or recourse for borrowers.
Bill of sale are regulated by two Victorian acts of law:
- The Bill of Sale Act 1878, and
- The Bill of Sale Act (1878) Amendment Act 1882.
According to the Law Commission, Bill of Sale's are antiquated and fraught with problems, both legally and practically as they:
- Allow vehicles to be repossessed on two payment defaults without a court order, offering no protection for Borrowers
- Give no protection to third party purchasers who unwittingly buy goods subject to Bill of Sale
In Scotland, Logbook Loans using Bill of Sale are not allowed under Scottish Law.
Rather, the Borrower signs an ‘agreement’ transferring ownership of the vehicle to the lender and the Borrower hires the vehicle back under a Hire Purchase (HP) agreement. The Borrower still retains full use of the vehicle providing payments are maintained and full ownership reverts to the Borrower when the final payment is made. Hire purchase agreements are regulated under current consumer legislation.
Over the last few years, the Government has been modernising regulation of the consumer credit market to ensure that it is fit-for-purpose and provides adequate consumer protection.
As part of this agenda, in 2014 the Government transferred responsibility for consumer credit regulation from the Office of Fair Trading (‘OFT’) to the Financial Conduct Authority (‘FCA’).
Responsibility for the regulation of consumer credit has enabled the FCA to tackle some concerns about Logbook Loans Lenders such as aggressive debt collection practices, but the FCA does not have the power to update the out-of-date legislation.
In 2015, the Law Commission initially consulted on the reform of the existing legislation and its final report and recommendations to reform the Bill of Sale Acts (Logbook loans) were published in September 2016.
It concluded that the current law is archaic and wholly unsuited to the 21st century. It recommended that the Bill of Sale Acts (Logbook loans) should be repealed in their entirety and replaced with a new “Goods Mortgages Act” to govern the way that individuals may use their existing goods as security for a loan or other obligations.
The aim of the proposed new legislation was to replace the outdated Bill of Sale Act, with a modern legal framework largely based upon the ‘hire purchase’ consumer credit business model, which has been in existence for many years.
In May 2017, the Government decided to shelve the Law Commission’s review and recommendations to reform the Bill of Sale Act for Logbook Loans in favour of working the FCA as they carry out their high-cost credit review.