Credit rules to stop 'extortionate' loans

Consumer credit rules will go some way to stopping lenders selling expensive loans to people on low incomes from Monday, credit law experts said yesterday after a court ruling released a Merseyside family from £380,000 of spiralling debts.

Tony and Michelle Meadows borrowed £5,750 in 1989 to make improvements to their semi-detached house in Southport. But they struggled to make repayments and faced losing their £200,000 house to pay the debt.

Judge Nigel Howarth at Liverpool county court said the combination of a high interest rate, legal fees, insurance costs and compound interest made the agreement "extortionate".

He prevented London North Securities, which had purchased the debt from Home Loans Northern, from recovering any of the Meadow's assets.

The Department of Trade and Industry, after pressure from consumer groups, has brought in rules to help prevent people with poor credit records from being charged sky high rates.

Lenders will be forced to advertise rates of interest that are offered to at least two thirds of those who apply for a loan. At the moment lenders need only offer half of applicants the headline rate.

Lenders will also be prevented from preying on customers who have "impaired" credit records, including county court judgements. They will need to offer the "typical" interest rate rather than trap them into rates double or even treble the average.

A spokesman for Citizens Advice said the number of people inquiring about debt problems had risen by 70% in the past decade to 700,000 a year. "These new rules will add a degree of transparency and will wake up customers to the debts they are taking on," he said, but added: "It doesn't go the whole way because it still relies on people knowing how APRs work."

The National Consumer Council (NCC) said the case highlighted the irresponsible practices of many lenders who targeted people in financial difficulty. It said daytime TV channels and tabloid newspapers were an important vehicle for this kind of advertising.

Claire Whyley, the deputy director of policy at the NCC, said: "It is totally irresponsible to market secured loans as an easy way to borrow - especially when bundling together several small unsecured loans.

"New consumer credit laws are in the pipeline and NCC hopes they'll bring tighter rules on advertising and marketing, improved methods of checking borrowers' ability to pay, and a much fairer treatment of people in arrears."

The Meadows were already in arrears on their mortgage when they took out their loan, which had an annual percentage rate of 34.9% repayable over 15 years.