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.

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."

By Vicky Shaw, Press Association