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Personal finance: Logbook loans run the risk of losing your car: Regulators are in pursuit of lenders who use a vehicle as security, charge 500% interest and harass defaulters.
[March 30, 2014]

Personal finance: Logbook loans run the risk of losing your car: Regulators are in pursuit of lenders who use a vehicle as security, charge 500% interest and harass defaulters.

(Observer (UK) Via Acquire Media NewsEdge) One borrower was on his way to work when his car was repossessed. Others have faced death threats and sexual harassment by lenders chasing repayments. Logbook loans, where borrowers put up their car as security for credit, have been worrying debt charities for some time, and now the City regulator has told The Observer of its concerns about a sector where rogue behaviour is widespread.

Officially known as bills of sale, logbook loans are usually used by people in a hurry for a lump sum who are unable to access credit from mainstream providers. The loans are often advertised as a way to access "fast cash" with "no credit checks" and allow people to raise larger sums than from a payday lender or other alternative credit provider. Providers are prepared to offer up to 50% of the car's value, with repayments typically arranged over a 12-month period. However, interest rates are often in excess of 500% APR, so costs quickly add up - and because lending is secured, cars can be repossessed if payments are missed.

The pounds 40m sector is currently regulated by the Office of Fair Trading, but from Tuesday it will move into the hands of the Financial Conduct Authority (FCA), alongside payday lenders and all other firms offering consumer credit. The new watchdog will start a review some time after that.

The FCA says it is concerned the market could be offering "bad value for money" and causing "significant harm" to consumers who have very few alternative sources of credit. It suggests there are "very poor levels" of compliance with current OFT regulations and widespread rogue behaviour, and some consumers are taking out loans when in distress, or as a last resort after being rejected for other forms of credit.

"Logbook lenders have borrowers over a barrel," says Christopher Woolard, director of policy, risk and research at the FCA. "People don't realise their car can be seized if they fall behind in repayments, with lenders often forcing borrowers to pay large amounts to keep their vehicle when they can't afford to." FCA research found that around 40,000 consumers took out logbook loans in 2013, typically borrowing pounds 1,000 a time, although lenders offer sums of up to pounds 50,000. In one case, it found a borrower was left stranded at the side of the road when the lender called in the debt. The borrower told the FCA: "I was on my way to work . . . a lorry was following me and came up next to me. This man was at the window, he reached in and took the keys. He looked like a police officer. He told me if I found pounds 1,200 right there they wouldn't take the car. They wouldn't let me get my stuff out of the car . . . " To make matters worse, cars that have been put up as security can be sold on to unsuspecting buyers. Research by Citizens Advice found that in one in five cases involving logbook loans, a car had been repossessed despite its owner not being the original borrower. In these cases, the buyer loses both their vehicle and the money they paid for it.

The charity said a third of logbook borrowers had not been treated fairly or appropriately, and a voluntary code of practice introduced by the industry two years ago was regularly being flouted. Some people it surveyed borrowed up to pounds 19,000 and paid back up to eight times their original debt. And it is concerned that the sector could grow when new rules on payday lenders reduce some borrowers' access to short-term credit.

Gillian Guy, chief executive of Citizens Advice says: "The logbook loans business is rife with lawless practices. Citizens Advice has helped people who have been subjected to abusive behaviour, sexual harassment and even death threats by lenders trying to take away their cars. Consumers also face confusing charges, sky-high interest rates and inadequate credit checks, making the industry a toxic mix of irresponsible lending and bullying debt collection." Guy called on the government to urgently review the rules around logbook lending and for the FCA to take action.

Woolard said the new regulator was prepared to act to reform the sector. "We expect firms to treat everybody fairly - so we are putting logbook lenders on notice. Our new rules give us the power to tackle any firm found not putting customers' interests first." NEW CREDIT RULES On 1 April the Financial Conduct Authority takes over regulation of the consumer credit market - around 50,000 firms offering catalogue accounts to credit cards. The new regulator has already announced a crackdown on payday lenders, and plans to look into debt advice and how short-term lenders treat borrowers who have fallen into arrears. It has greater powers than the previous regulator, the Office of Fair Trading, and intends to use them.

In changes coming into force in July, the FCA will ban short-term lenders from rolling over loans more than twice and from making serial unsuccessful attempts to take repayments from people's bank accounts. The head of the FCA has said the restrictions could lead to a quarter of payday lenders withdrawing from the market.

The FCA has also been tasked with deciding on a cap for the cost of payday loans, where interest rates can be in excess of 5,000% a year. A limit could come into force at the end of the year.

Captions: Borrowers' cars can be seized if they fall behind with repayments. Getty Gillian Guy: 'The business is rife with lawless practices.' (c) 2014 Guardian Newspapers Limited.

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