FCA issues warning on logbook loans

Vulnerable people who use their car as security to take out a loan are finding themselves squeezed even harder financially and even threatened, the City regulator has found.

A logbook loan means a motorist can carry on driving their car, as long as they keep up their repayments
A logbook loan means a motorist can carry on driving their car, as long as they keep up their repayments

The Financial Conduct Authority warned it will put firms offering logbook loans out of action if they do not "dramatically" improve their standards, after finding evidence of poor behaviour including little or no affordability checks being carried out and some applicants being encouraged to manipulate details of their income.

It said lenders are failing to properly spell out exactly how expensive such debts will be, with the true cost often masked by an emphasis on "low" weekly repayments and key terms and conditions buried in small print. Often, the APRs (annual percentage rates) attached to such loans are 400% or higher.

This lack of explanation could involve failing to mention the potential consequences of missing repayments, including potentially losing your car.

A "small number" of people who had taken out a logbook loan did have their vehicle repossessed or voluntarily surrendered their car because they could not keep payments up, researchers found.

Some had traumatic repossession experiences, such as being pulled over on the way to work and left stranded by the roadside.

Those who ran into problems repaying their debts came up against what they felt was "aggressive or difficult lender behaviour", the FCA said.

The regulator estimates that around 60,000 logbook loans will be taken out this year and the industry is worth an estimated £60 million to £75 million.

These loans have been compared with using a pawnbroker, in that full ownership of the car is retained until the loan has been paid off. But unlike handing over items to a pawnbroker, someone taking out a logbook loan can carry on driving their car, as long as they keep up their repayments.

Typically, logbook loans are taken out for around 12-18 months. The average amount borrowed is £1,000 but it can be as high as £50,000. The time taken to approve a loan varies from a few hours to a few days.

The FCA took on responsibility for regulating logbook loans in April. Every firm currently doing consumer credit business has to have an "interim permission", but will need to eventually become fully authorised by the FCA.

Logbook lenders will need to apply for full authorisation from between January and April next year. The FCA warned that any firms that are not up to scratch will not be authorised.

Christopher Woolard, director of policy, risk and research at the FCA, said: "People who use logbook loans are often in difficult circumstances with few other borrowing options.

"The last thing that should be happening is for them to be squeezed yet more or even threatened, but that is what our research has found.

"Our new rules give us the power to tackle those firms found not putting customers' interests first and remove them from the market if they don't improve.

"Logbook lenders should consider this as fair notice to improve and put their customers first or we won't hesitate to take action."

The FCA found that many people who used logbook loans had also used high-interest payday lenders.

"Almost all" logbook loan borrowers the FCA spoke to had opted for this product because they did not feel they could raise such a large amount of cash from elsewhere.

Most were already dealing with financial challenges such as juggling debts or unexpected bills or expenses. A few needed the money for life events and a minority had a problem drinking or gambling habit.

The majority spoken to by the FCA ran into difficulties during the course of repaying their loans. Many felt that this was due to a perceived disparity between the information they were given verbally about the loan and what they actually signed up to. People also reported "stressful" admin errors during the course of repayments.

There were also reports that lenders carried on taking payments from borrowers' bank accounts even after they had paid the loan off, in some cases for months before the consumer realised and claimed the money back.

Consumers who had paid their loan back fully also reported being badgered by unwanted marketing material encouraging them to take out new loans.

Many borrowers had never heard of a "logbook loan" before taking one out. Most first became aware of them through their association with other credit products, such as payday loans, or through targeted marketing emails.

Several consumers had their car inspected in isolated car parks and side roads. Some were unhappy with the way in which meetings were set up, describing how they could take place in a "borrowed" space, such as within the branch of a pawnbroker.

During such meetings, some people reported being encouraged by the representative to provide the "right" information about income and expenditure .

For example, one described how the representative made several phone calls to his boss to check if it would be OK to slightly adjust her income details so that she would be eligible to pay back the loan within a shorter time frame.

The FCA also heard from a woman in her late 20s who said she was told her first payment would not be for two weeks, but then received a letter within the first week saying she had missed a payment.

Gillian Guy, chief executive of Citizens Advice, said the law should also be changed to help people who unwittingly buy a used car which has been the subject of a logbook loan.

She said: "Innocent third parties are being caught in the net by logbook loans that they unknowingly inherit when they buy a used car. Citizens Advice helped one man who lost his car after spending £2,000 buying it online and fixing it up...

"The law needs to change so third parties are protected from logbook loans taken out on used cars so that consumers don't face this risk when buying a used car."

Mike O'Connor, chief executive of StepChange Debt Charity, said: "Day after day, we see examples of unscrupulous and damaging behaviour from payday and logbook lenders... The consequences for individuals and their families can be devastating."