Protecting consumers from unfair logbook loans
Every year thousands of borrowers and unwitting buyers of second-hand vehicles are falling victim to unfair logbook loans because the law does not protect them.
Logbook loans are a way for borrowers to use their car or van as security for a loan. The lender takes on ownership of the vehicle but the borrower can carry on using it. But borrowers who miss payments can swiftly face repossession of their vehicle as well as a rapidly increasing outstanding loan and high charges – even if they have already paid off most of their loan. And anyone buying a second-hand vehicle that is still subject to a logbook loan can unexpectedly find themselves losing the vehicle or having to pay off the loan.
In a report published today, the Law Commission is recommending changes to the law that would make this form of lending fairer for borrowers and offer greater protection to people buying second-hand vehicles that are still subject to these loans.
Under the Commission’s recommended reforms, borrowers and buyers would be given similar protections to those offered by hire-purchase law:
- Borrowers would have more time to pay – a borrower who is temporarily unable to pay but has already repaid more than one third of the loan could stop lenders repossessing the vehicle without a court order.
- Borrowers could end the agreement – a borrower who cannot make any more payments would have the right to hand the car back to the lender and not be liable for the remainder of the loan.
- Buyers of second-hand vehicles would be protected – where a private individual buys a vehicle in good faith and without knowing that it is subject to a logbook loan, they would become the owner of the vehicle and would not be liable for the loan.
Stephen Lewis, Law Commissioner for Commercial and Common Law, said:
“Borrowers are increasingly turning to logbook loans to raise cash, but many who default rapidly find themselves out of pocket and their vehicle repossessed. People buying second-hand vehicles understandably expect the law to protect them but it is out of date and out of step with other consumer legislation.
“It is high time the law was reformed to bring protections to both logbook loan borrowers and the unwitting purchasers who, in all good faith, buy second-hand vehicles that are still subject to these widely used and unfair loans.”
Logbook loans are regulated by the Bills of Sale Act 1878 and the Bills of Sale Act 1882. The use of bills of sale, where people can use goods they own as security while retaining possession of those goods, has grown from under 3,000 in 2001 to over 37,000 in 2015. They are now mostly used for “logbook loans”.
The Law Commission recommends that the Bills of Sale Acts should be replaced by a new Goods Mortgages Act, and suggests more than 30 reforms designed to make the law fairer, increase protection for consumers, reduce costs and make it easier for small businesses to give security for loans.
Details are set out in the Commission’s report, Bills of Sale, which is available on lawcom.gov.uk.
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Notes for editors
- The Law Commission is a non-political independent body, set up by Parliament in 1965 to keep all the law of England and Wales under review, and to recommend reform where it is needed.
- The Law Commission was asked by HM Treasury in September 2014 to examine the Bills of Sale Acts and consider how they could be reformed. The Terms of Reference agreed with HM Treasury are available in the Commission’s report, Bills of Sale, p2.
- In 2015, 37,708 bills of sale were registered (compared with 2,840 in 2001). 90% were logbook loans.
- For more details on this project, visit https://lawcom.gov.uk/project/bills-of-sale.
- For all press queries and consumer stories/potential interviewees, please contact:
Phil Hodgson, Head of External Relations: 020 3334 3305
Jackie Samuel: 020 3334 3648