Why is the UK Government introducing mortgages for cars?
With all the attention that has being given to Brexit, not all the UK Government’s planned legislation for the next year has received the same level of attention. This is certainly true in the case of the Goods Mortgages Bill, which will abolish the Victorian rules that currently govern log book loans in England, Wales, and Northern Ireland and introduce mortgages for cars.
Many people will have heard of log book loans, but possibly not of bills of sale. Bills of sale are the legal instruments that allow log book loans to be legal in England, Wales, and Northern Ireland.
They are a type of security that can be applied over certain types of property, usually cars, in return for a consumer being given a loan. In recent years, with the growth of log book loans, these types of securities have become far more common, with the number of them rising from less than 3,000 in 2001 to over 37,000 in 2015.
In effect, the way they work is the borrower grants a bill of sale over their car. This then creates a security over the car, which means the lender owns the car, but the borrower can keep possession of it. If the borrower fails to keep up the repayments.
The vehicle can then be repossessed, even without a court order, unless the bill of sale has not been registered with the High Court, in which case permission must always be sought from the court.
In Scotland, although firms offer log book loans, they operate differently as it’s not possible to secure a loan over a car using a bill of sale, so instead firms purchase the vehicle, then enters into a hire purchase or conditional sale agreement with the borrower, allowing them to keep the car.
Although the effect may be the same, the difference in the legal procedure is important, as it means Scottish borrowers with log book loans have more rights than borrowers in the rest of the UK, as the Consumer Credit Act 1974 and 2006 governs hire purchase and conditional sale agreements.
What are the advantages and disadvantages of log book loans?
Log book loans are generally seen as a high-risk method of borrowing, although not as high risk as a pay day loan. Annual interest rates can easily be 400% or above, and if you miss payments, you may lose your car. You can also still be left with debts to pay where the sale of the car fails to pay off the amount that has been borrowed.
Normally, log book loans can be attractive to people who have poor credit ratings, as it can allow them to borrow money quickly, and often borrow more than they could if they didn’t offer their car up as a security.
The amounts borrowed can be as little as £500, but depending on the value of the car, can also be for amounts in the tens of thousands of pounds.
To obtain a log book loan you will normally need to own your car outright and have no other finance secured on it, although sometimes, where the amount secured is small, it may still be possible to obtain a loan if the first lender agrees.
Goods Mortgages Bill
Because of the rise in the number of these loans, and the fact they are often used by people for the same reason pay day loans are used, HM Treasury in 2014 asked the UK Law Commission to investigate them and produce a report.
In 2016 the Law Commission completed its investigations and recommended that the law governing them, the Bills of Sale Acts of 1878 and 1882 be abolished.
The Commission, however, also recognised that log book loans were an important form of credit, particularly for people with poor credit ratings, so did not recommend they be abolished totally.
It recommended this area of law be modernised, so it was easier for consumers to understand, and proposed consumers be provided with greater protections. It also produced a draft bill, which is the one the UK Government now intends to lay before parliament.
What improvements will there be?
The first recommendations that will be introduced will be a change in the terminology used. In future, these types of agreements will be known as Goods Mortgages or Vehicle Mortgages, so people understand that like the mortgages we take over our homes, if they are not paid, the car can be repossessed.
It will also be necessary in future for all agreements to be put in writing and for those agreements to be witnessed by a third party. The wording of the agreements will also be simplified to make them easier to read.
Lenders will also be restricted on what grounds they can use to repossess a car. Going forward it will only be possible when the borrower:
- defaults on payments under the agreement; or
- defaults on the maintenance or insurance of the goods; or
- tries to sell the goods without the permission of the lender; or
- becomes bankrupt.
However, the types of borrowing the agreements can be used for will be extended, so it’s not just for fixed sum loans, but also revolving credit agreements like overdrafts and when a personal guarantee is given for someone else’s borrowing.
There will also be a prohibition on the types of goods that Goods Mortgages can be used for, so they cannot be secured over essential household items.
It will also need to be made clear in agreements, that when a borrower is a consumer, failure to maintain payments could lead to goods being repossessed.
Lenders will also not be able to repossess goods where they are on private property, without first obtaining a court order or the borrower’s permission. Also, where the borrower has made one third of the payments due under an agreement, they will also have an opportunity, when a default notice is served, to opt into not having the car repossessed unless a court order is obtained first.
Where they don’t choose this option, they will also be given the opportunity to voluntarily terminate the agreement by surrendering the car in full and final settlement of any debt owed, providing the car has not suffered any damage.
Lenders will also not be required to register the agreements with the High Court, but will have an option of registering it with a designated asset finance firm, which would make it easier for other firms to check before deciding to lend to the borrower. Where a firm doesn’t register their interest, other firms who lend to the borrower and register their security, will get priority over them.
Finally, there will be increased protections for private purchasers who buy a vehicle that has a mortgage over it. Providing they do so in good faith they will get ownership of the vehicle, which will increase the risk for those that often lend money in return for such securities.
These changes, however, will still only apply to England, Wales, and Northern Ireland, which means in Scotland, log book loans or car mortgages, will continue to be governed by the rules relating to hire purchase agreements and conditional sale agreements.
At Creditfix we welcome these changes and acknowledge, like all borrowing, Car Mortgages will have their place, but like with log book loans, for us they are usually a red flag that someone is experiencing financial difficulties. We would, therefore, advise consumers considering taking on this type of borrowing, to seek advice first. It may well be that an Individual Voluntary Arrangement or a Protected Trust Deed may offer a better solution, without placing cars at risk.
If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.