Crackdown on loan sharks to beat debt trap

A crackdown on loan sharks and new measures to encourage more responsible lending and borrowing were yesterday unveiled by the government in an attempt to halt a "worrying" rise in the number of people falling into the debt trap.

The package of proposals includes new powers to fine rogue lenders as well as stripping then of their credit licences, and revamping the consumer credit legislation so that the protection it offers is extended to many more loans.

There are also measures to end the practice of hiding important information about a loan or credit deal in "microscopic" small print, to curb misleading and irresponsible marketing techniques such as unsolicited mailshots offering immediate credit limits of up to £25,000, and help for people wanting to pay off their loan early or switch to a better deal.

Unveiling what was hailed as the biggest shake-up of consumer credit laws for a generation, Melanie Johnson, the consumer affairs minister, said the government was concerned about the number of people getting loans at often extortionate rates of interest. These annual percentage rates (APRs) can be as high as 200% from a legal lender and 1,000%-plus from loan sharks.

More also needed to be done to ensure consumers knew what they were letting them selves in for when they signed up for credit, she said. Britain's credit laws are almost 30 years old. In this time there has been an explosion in the use of credit cards and other developments such as online shopping.

The backdrop to the government's move is a dramatic increase in consumer borrowing, fuelled by the buoyant economy. Bank of England figures show that in December 1997, total outstanding consumer credit, excluding mortgages, was £87.5bn. By December 2000 this had jumped to £127.4bn. At the same time, the National Association of Citizens Advice Bureaux has seen the number of inquiries relating to debt problems rise by 37% over the past two years.

But the picture is muddied by other evidence that suggests consumers and financial institutions are behaving responsibly.

Only yesterday, figures showed that the number of homes repossessed and the number of people more than 12 months behind with mortgage payments have fallen to a 12-year low.

While the new measures were welcomed by Nacab and others, the government disappointed some by not setting maximum loan rates, saying that it was "a matter for lenders what they charge".

The proposals include:

• Giving the office of fair trading stronger powers so that it can issue "hefty fines" against rogue lenders as well as revoking their licences. The levels of these fines have not yet been decided by the government.

• Clamping down on irresponsible lending by requiring lenders to look more closely at whether prospective borrowers are already over-committed.

• Raising the current £25,000 limit for loans and credit agreements covered by the Consumer Credit Act.

• Stopping the interest-free credit "sting" where people taking advantage of "buy now, pay later" offers who pay even one day late are hit with backdated interest at a very high rate which can effectively double the cost of the item. In future, borrowers will have to be notified in advance of their final payment date and given a brief breathing space to settle the loan.

• Curbing misleading and irresponsible advertising by bringing in a code of best practice .

Lending pitfalls that catch the unwary

Three cases from Citizens Advice Bureau files:

Case one: Extortionate interest rates

A Merseyside woman took out a £3,000 loan from a lending company 10 years ago. She was unable to keep up payments, and at court hearing four years ago it was agreed she would pay £155 a month (original payment was £105 a month). She has managed to maintain payments with only a few exceptions. Has now received a letter from lender saying her monthly payments have risen to £457.63 due to interest charges, and she would have to pay £18,000 to clear loan.

Case two: Interest-free credit sting

A Citizens Advice Bureau client in the west Midlands signed a 12-month interest-free credit agreement to buy furniture. The goods were delivered on the 4th of the month and the credit agreement was dated the 12th. When he went to pay the £731 cost of the furniture 12 months later he was told he owed £1,432 - most of which was backdated interest - because the interest-free period ran from the delivery date, not the date of the credit agreement.

Case three: Irresponsible lending

A 28-year-old Essex man who earns £20,000 a year has been falling deeper into debt after being granted a gold credit card at university. He owes more than £25,000 on various loans and credit cards yet is still targeted with offers of additional credit. He has sought advice on bankruptcy.