'Logbook lenders' are flouting the law, say debt advisers

Action needs to be taken to regulate companies that offer "logbook loans", according to debt advisers, who say the industry is employing many of the practices that have given payday lenders a bad reputation.

With these loans, officially called bills of sale, borrowers use their car as security: if they fail to keep up repayments, the vehicle can be seized. Citizens Advice says logbook lenders have been known to use sexual harassment and death threats to intimidate customers.

A voluntary code of practice was introduced by the industry more than two years ago but analysis by Citizens Advice of 261 cases between February 2011 and January 2014 suggests it is being regularly flouted. The average loan was £1,286 but some people had borrowed up to £19,000 and had paid back up to eight times the amount.

One in five of the cases looked at had resulted in a car being repossessed, despite the owner not being the original borrower. The vehicles had been sold with the loans still attached and the new owners were unaware that they had been used as security.

Citizens Advice is calling on the government and Financial Conduct Authority to require that lenders obtain a court order before they can take away a car, and to stop repossessions of cars that have been sold on with loans.

"The logbook industry is still in the dark ages and has been getting away with lawless practices," said Gillian Guy, chief executive of Citizens Advice. "It is absolutely absurd that a firm should be able to take away someone's possessions without any due legal process. High interest rates and lack of affordability checks, as well as threatening practices and phantom charges, mean logbook loans are a toxic mix of the worst parts of payday loans and unruly bailiffs."

Many of the laws concerning bills of sale have not changed since the Victorian era and the language they employ is old-fashioned and confusing, according to Citizens Advice. The code of practice states that credit documents should be in "plain and intelligible language", yet some borrowers were unsure of the terms of their loan and its repayment schedule. One woman who took out a loan for £1,000 believed that it could be paid off in three months but discovered that she was tied into it for two years.

The Citizens Advice analysis of logbook loan cases found that 14% had experienced harsh debt collection practices, while 28% were not treated fairly or appropriately by the lender. Almost a fifth had not had the terms of their loans clearly explained, while nearly a tenth had not undergone proper checks to make sure they could repay, and a similar proportion had been charged excessive interest rates.

The report cites a single mother of three, whose property had been repossessed, who took out a logbook loan for just under £1,000 but was unable to meet repayments which totalled nearly £3,000 and carried an annual interest rate of more than 500%.

A 22-year-old man bought a car online for £1,300 and spent an additional £700 on improvements. He was given a logbook but there was no indication the car was subject to a bill of sale. He believed his car had been stolen one night but police told him it had been legally repossessed by a logbook loan company, and he ended up £2,000 out of pocket.

One woman who took out a logbook loan had to give up work due to severe back problems. She fell into arrears and was visited by the lender. She was on a cocktail of painkillers and was pushed to enter into a further agreement. When she was unable to meet these payments, she started receiving texts from a representative of the company, who suggested that, in return for sexual favours, he would warn her when the company was about to come and remove her vehicle.

Experts said they feared the industry was thriving because it was not subject to the same sort of scrutiny as payday lending. "It is really important that, while payday lending is quite rightly tackled, other harmful forms of credit aren't allowed to expand on the sideline," Guy said. "Our evidence shows that logbook lenders have paid little regard to the voluntary code and highlights the need for a tough stance from the Financial Conduct Authority."