Logbook loans signal increasing debt risk

CONSUMERS who buy second-hand cars are at risk of unwittingly inheriting debts taken out by the previous owner that could end up with their vehicle being seized, Citizens' Advice is warning.

The charity said one in five people who reported a problem to it about “logbook loans”, where a person places their car as security against a loan, ended up having their car repossessed – despite not being the one who borrowed the money.

Citizens' Advice warned someone who buys a car which is still the subject of an outstanding logbook loan taken out by a previous owner could end up being chased for the debt – leaving them with the choice of making the repayments or having their vehicle repossessed.

It fears that the risk of this happening is growing, with an estimated 60,000 logbook loans set to be taken out this year, marking a 61% increase on 2011.

A survey by Citizens Advice of 874 drivers who had bought a second-hand car found that nearly two-thirds (63%) did not check if the car had an outstanding loan attached and two in five had never heard of a logbook loan.

Analysis by the charity of more than 250 logbook loan cases reported to it in recent years showed that one fifth of people had their car seized despite not being the original borrower.

According to recent research by the Financial Conduct Authority (FCA), the average size of a logbook loan is £1,000, but it can be as high as £50,000.

The FCA, which recently took over regulation of the consumer credit market, warned firms offering logbook loans earlier this month that it will put them out of action if they do not ''dramatically'' improve their standards.

It found evidence of poor behaviour including little or no affordability checks being carried out and some loan applicants being encouraged to manipulate details of their income.

By Vicky Shaw, Press Association Personal Finance Correspondent