“Archaic” logbook loans look set to be banned, under new proposals announced this week.
The number of registered logbook loans, which are secured against the value of the borrower’s car, has jumped in recent years, with nearly 40,000 worth £30 million taken out between April 2008 and March 2009.
However, the government is concerned that such loans, also known as 'bills of sale', leave borrowers at risk because their vehicle can be seized without a court order. It also believes this type of lending encourages people to slip further into debt.
"These bills of sale are archaic and allow vulnerable peoples' goods to be seized without a court order,” says consumer minister Kevin Brennan. “They were developed in the days of Charles Dickens and don't meet 21st Century consumer standards.”
Logbook loans, which are mainly taken out by people who need money quickly and have a bad credit history, are notoriously expensive, with interest rates potentially as high as 600%.
Although the borrower retains possession of their vehicle and can continue using it, they must sign over the V5 logbook to the lender. This gives it temporary ownership, through a bill of sale, until the debt is repaid.
More than 1,000 people have complained to the Office of Fair Trading about problems with logbook loans over the past four years, with claims of losses totaling £1.47 million. And Citizens Advice reports a 100% increase in enquiries relating to logbook loans over the past year.
The lack of protection available to borrowers in arrears, unfair collection practices and the excessively high cost of these loans were the biggest causes for complaint.
In one recent case, Citizens Advice says a mother of two took out a £500 loan after her husband lost his job – it has already grown to £1,500, and her car is worth less than £2,000.
In another recent case, logbook loan paperwork contained a provision that allowed the lender to "break open doors or windows to obtain admission" to any premises on which the vehicle was situated.
The government is likely to ban logbook loans altogether, although it is also considering introducing new laws to protect consumers. A consultation on the proposals will run for 12 weeks.