Could proposed Law Commission reforms on how individuals can use cars as security for loans and other obligations inject further life into the automotive sector and its finance providers? Gowling’s Matthew Harvey, Stephan Smoktunowicz and Stuart Young write

The current law on how individuals can create security for loans predates the first two-seater motor vehicle completed by Carl Benz in 1885.

Go deeper with GlobalData

Data Insights

The gold standard of business intelligence.

Find out more

So, it is little wonder that existing Bills of Sale legislation is widely seen as out-of-date and due for a much-needed overhaul. For the automotive sector, the two aspects of the existing regime that have received the most criticism are:

  • Purchasers are at risk of having their vehicle repossessed, if a previous ‘logbook loan’ taken out to finance the purchase of that vehicle has not been fully repaid, and
  • Borrowers going into minor default under a logbook loan risk seeing their vehicles repossessed without a court order – even where a missed payment was just a ‘blip’.

New proposals to help?

The Law Commission is proposing a new Goods Mortgages Bill, which could address these flaws in the following ways:

  • A new registration system is proposed, which would have the potential to marry up vehicle registration information held by the DVLA, with details on a ‘goods mortgage register’. That could in turn be linked to vehicle identification numbers or other unique identifiers – for example, on-board computer codes – to provide a robust record of whether a vehicle is currently subject to outstanding security granted by an individual.
  • Commercial purchasers could then search the goods mortgage register to check whether any security has been taken over a vehicle owned by an individual. Private individual purchasers would be protected on their purchases, as long as they act in good faith and do not have actual notice of the mortgage. And vehicle financiers could also check the register to see whether there is any security granted by individuals against a vehicle that they propose to fund.
  • That is also backed up by a responsibility on those who have granted a goods mortgage, to disclose its existence. Otherwise they may face up to 10 years in jail for fraud.
  • Possession rights will broadly be unchanged. However, there will be some new restrictions on when financiers can take possession of vehicles and on when they can enter premises without consent or a court order. These changes provide more comfort to a vehicle owner that financiers cannot repossess unless there is good justification for doing so, and there are new procedures that financiers will have to follow when enforcing.

New finance streams

Car finance by way of loans has been around for a while, and that is unlikely to change.

For the new car market, personal contract plans are already a very popular method of finance, as they typically allow the individual to make hire-type payments over, say, three to five years, with the option to purchase or return the vehicle at the end of the term. That flexibility can be very attractive to individuals as it allows them to consider switching to a new vehicle at the end of the term, without committing to the full purchase price or a high-value loan. We expect that form of finance will remain popular.

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData
Visit our Privacy Policy for more information about our services, how we may use, process and share your personal data, including information of your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.

Better assurances

However, it is the new goods mortgage register that may breathe new life into the used car market.

That is because it would help to remove the existing repossession risks associated with purchasers not knowing about existing logbook loans, and it would give borrowers better assurances that they will not have their cars repossessed for minor defaults.

Increased borrower confidence could make secured car finance more attractive. And as the sums involved in financing used cars are typically lower than those for new cars, secured loans with terms of, say, 24-60 months may provide individual purchasers with the ability to purchase a good, reliable second-hand vehicle by way of regular instalments, knowing that the vehicle is theirs once the final loan instalment has been repaid.

In turn, a well-maintained security register should allow financiers to both safely protect their security interest in a vehicle and perform pre-lending checks for existing security with greater ease and confidence.

That greater comfort should expand the market and, at the same time, reduce enforcement costs and uncertainty. Both these factors should result in savings for consumers and better profits for finance companies.