Bill of sale loans are due for reform, but Optima
Legal’s Nicola Hoskins asks how have they lasted so
long.
Go deeper with GlobalData
Although logbook loans appear to be
a relatively recent arrival in the UK high-cost credit market,
their roots can be traced back to the Victorian era, with the 1854
Bills of Sale Act.
And they are by no means marginal –
in the first six months of 2010, around 19,000 bills were
registered, representing an estimated £38m-£40m.
The loans are secured by the
borrower executing a bill of sale. The asset, usually a vehicle, is
secured in favour of the lender, who agrees not to take possession
of it unless there is default in the payment terms of the
agreement.
This means that the borrower keeps
possession of the property, but it allows the lender to circumvent
the protection given to borrowers by the Consumer Credit Acts,
because, if the borrower defaults, the lender can take possession
of the asset and sell it without first obtaining a court order.
This was the aim of the Victorian legislators – to protect the
lender’s asset without providing any corresponding protection to
the borrower.
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By GlobalDataIn fact, some agreements have
embraced the spirit rather too enthusiastically, and have made
provision for the use of force – including breaking windows of
premises – where a vehicle is to be seized and it is kept on third
party premises. This goes some way towards explaining why these
loans have gained a degree of notoriety, and why the Labour
government intended to outlaw them.
However, the present government has
given the industry an opportunity to put its house in order, and is
encouraging providers to sign up to a code of practice in order to
raise standards.
It begs the question why would the
government want to keep open an avenue of credit which falls so
squarely outside the norm? The answer seems to be related to the
credit crunch in general.
The Department for Business,
Innovation & Skills has noted that 18% of these loans are made
to small businesses and sole traders. Frequently, access to
short-term credit is required to ease a cash flow problem, and
logbook loans are arguably a fast and straightforward way to
achieve this.
Credit is still difficult to access for businesses and
individuals alike. But many argue that it would be better for the
government to address this issue rather than legitimising, and
thereby encouraging, the growth of logbook loans – via a vehicle
that was never truly designed for them, if you’ll forgive the
pun.
