The Original Logbook Loan
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 Loans’
A logbook loan is a type of loan that allows car owners to withdraw equity from their car, provided it is free of finance. The owner puts the car up as security against the loan and can retain full personal use of their vehicle for the duration of the loan. The original logbook loan used a bill of sale to secure the car against the loan via the Bill of Sale Act of 1882 and a consumer credit agreement against the borrower.
Bills of sale are incredibly old and date back to the late 18 century and were used originally goods such as dogs, horses. Its only in recent years have been adapted for homes and vehicles. The role of the bill of sale is to transfer ownership of the item between parties. The bill also acts as evidence of the transaction and will record all relevant information, such as date, location, and monies transferred into consideration.
What is the role of a bill of sale in a logbook loan?
In England, Wales, and Northern Ireland, a Logbook Loan consists of a bill of sale agreement and a consumer credit agreement securing the loan on the vehicle. However, the borrower will also be required to surrender your V5C logbook and often the spare key.
Upon signing both agreements, the ownership of the vehicle is transferred to the lender. This is then stamped in the Royal Courts of Justice within 7 days, and the bill of sale is then valid. In addition, a bill of sale offers limited protection or recourse for borrowers. More importantly, it extends powers to the lender and allows repossession without a court order if the borrower defaults on two payments.
It’s worth noting, England, Wales, and Northern Ireland recognises a Bill of Sale by law; in Scotland, these documents are illegal and therefore not used.
When the loan is settled by the borrower, the bill of sale that is linked with the logbook loan and vehicle becomes invalid, and the car’s ownership transfers back immediately.
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 a 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, provided 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 and are considered fit for purpose.
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 loan lenders, such as aggressive debt collection practices, but the FCA does not have the power to update the outdated 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 was recommended that the Bill of Sale Acts (logbook loans) 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 favor of working on the FCA as they carried out their high-cost credit review.
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