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The New Payday Loans: 400% Interest Rates And You Could Lose Your Car

Remember the the controversy over payday loans with sky-high interest rates? Now politicians are turning their attention towards legal "logbook loans". Their use is up 44% in the last three years.

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Logbook loans are a high-risk form of borrowing that involves signing over legal ownership of an item, often a car, in return for a loan. If the person borrowing the money doesn't keep up the repayments – often at interest rates of around 400% a year – then the lender gets to seize the car without any notice.

In recent years the popularity of these loans, usually taken out by the young and poor, has surged. A Freedom of Information request passed to BuzzFeed News by the Citizens Advice service shows their number has increased by 44% to 53,000 over the last three years.

The consumer charity said it expects to help at least 1,000 individuals struggling with logbook loans between April 2014 and March 2015 – meaning around 1 in 50 people who take out such a loan each year will appeal for help with this single charity.

Adverts on Google promise logbook-loan cash within an hour.

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There is no suggestion that the companies involved are providing anything other than a completely legal service, but charities and MPs believe many people don't understand the loans they are taking out.

Stella Creasy, the Labour MP for Walthamstow, who led the campaign to cap interest rates on payday loans such as those provided by Wonga, told BuzzFeed News that there needed to be a ban on logbook loans. "We tried to abolish them in consumer rights bill but the government voted against," she said.

"The crucial thing about a logbook loan is that it has none of the forms of consumer protection. It's got none of the forms of protection of other forms of credit.

"There is a very clear loophole. All the protection you think you should have when you buy something doesn't exist – and that's what these companies are exploiting. Even if it is fine to take out a loan at a high rate of interest then you should have some form of consumer protection."

For a start, logbook loans are regulated by a law passed in 1878 and designed mainly for loans relating to shipping.

After years of lobbying, the coalition government introduced a cap on the high rates of interest charged by more straightforward payday-loan companies.

But logbook loans exploit a loophole and so remain regulated by the 1878 Bills of Sale Act. This historical legislation also regulates such arcane matters as "water-wheels and steam-engines, and the steam-boilers, donkey engines, and other fixed appurtenances of the said motive-powers". It certainly wasn't designed for a desperate individual in 2015 borrowing £2,000 against his Nissan Micra.

As Creasy put it: "You have no protection through the courts. They can even repossess the car without telling you. The outlook for high-cost credit in this country is pretty good because demand is only going to grow – half the people in London can't make it to the end of the month without borrowing.

"Until [debt] becomes a political priority for everyone you're going to see a massive black hole at the heart of our economy, which is personal debt. There is no appetite in government for tackling the personal debt landscape. Our economy falls apart if everyone is this financially precarious."

In one example seen by Citizens Advice a man lost his £8,000 car and still owes £5,000 to the loan company:

John visited his local Citizens Advice Bureau in the South East of England for advice about a logbook loan. He had taken out a loan for £2,250 in March 2013 against a car worth £8,000 and agreed to make payments of £75 per week. John made a few payments but then fell behind and the amount he owed spiralled.

The loan company repossessed his car in December 2013 and kept writing to him for more money. The last letter sent to John said he owed an additional £5,000, even though the value of the car should have more than covered the original debt and any interest payable.

What's more, the charity has seen cases of people with logbook loans selling their cars to unknowing buyers. The new buyers then lose the car when the loan isn't repaid:

A 22-year-old man from the South East bought a car on the internet for £1,300 and spent an additional £600–£700 on improvements to it. He was given a logbook with the car but there was no indication that the car was subject to a bill of sale loan. He found that his car seemed to have been stolen one night but when he contacted the police he was informed that the car had been legally repossessed by a logbook loan company.

The original owner had bought the car legally but taken a logbook loan out on it and then sold it on. The client lost his car and £2,000. He faced having to recover his losses through a court process but had no guarantee of success and was unclear which of the former owners he should take to court.

Citizens Advice suggested that logbook loans are often used when all other options have been exhausted.

Individuals who are struggling with debts often come to seek help from the charity, enabling them to work who is taking what forms of debt.

On balance, people who have taken out logbook loans have an average of 10 different debts totalling around £23,000. By comparison, a typical individual who comes to the charity while struggling to meet repayments has an average of five debts totalling £14,000.

This points towards logbook loans being a last resort of the already indebted: usually the young and very poor. Right now, they remain unregulated.

Jim Waterson is a politics editor for BuzzFeed News and is based in London.

Contact Jim Waterson at jim.waterson@buzzfeed.com.

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