From here to eternity...

When David Taylor fell behind with payments on the mortgage on his home 14 years ago, he took out a loan for £4,000 from a company advertising in the back of a tabloid newspaper. The interest rate was 34.9per cent.

The loan was secured on the house in Hertfordshire and was to be paid back over 15 years. Shortly after taking out the loan, however, he ran into problems - he was out of work and missed his repayments for six months.

David believed he had made up for this by increasing his contributions from £110 to £150 a month for a time. With £18,000 already paid back and less than a year left on the loan, David called his loan company to talk about clearing his balance early.

He was appalled to discover he still owes £85,346.

'I was absolutely shocked and told the firm to look again as they must have got a decimal point in the wrong place,' he says. 'Then they told me the balance owed was due to extra interest payments I had accrued on the loan.

'I have been to the Citizens Advice Bureau but they have told me that while this is bad practice, it is also legal and there is not a lot I can do about it.'

The Citizens Advice Bureau say that the reason David owes so much is that when he was unable to keep up repayments this triggered extreme penalty rates of interest.

'The loan company started charging interest on top of interest once David had missed some repayments,' says his case worker at the Stevenage bureau.

'Because interest is calculated daily, even being one day late can be vastly expensive.

'Since falling behind with the repayments, the amount David has been paying each month has only been chipping away at the interest and not paying off the capital. His additional monthly interest is now £419. This means that the repayments of £110 he makes are only paying off a quarter of the interest, and additional interest is being charged on the remaining £309 as well as on the previous balance.'

David's case worker says that a 'terribly complicated formula' is used to calculate interest and that while borrowers and even the courts find it difficult to understand, stating the terms of loans in this way is not at present illegal.

'I hope the changes in the law help other people to avoid my situation,' says David. 'I'm absolutely devastated'

Where else can I go?

Most expensive loans are taken out away from
the high street by people who have had difficulty
getting mainstream credit. So what alternatives
do they have?

'Credit unions are a good option,' says Lisa
Colclough, team leader at the National Debtline,
a charity. 'You save with them and then borrow
up to three times what you've saved at a low
cost.'

A credit union is a financial co-operative where
members save into a collective fund. They can
then take out low-cost loans, on the law dictates
that they cannot be charged more than 1 per cent
a month on the reducing balance.

A ?500 loan over one year, for example, would
cost a maximum of ?533, and loan protection
insurance is included free of charge.

Unfortunately the reality is that many people who
take out high-cost loans do so under pressure,
and have had no chance to save. Those who do
use credit unions, however, often find they can be
a godsend if they suddenly find themselves in
financial difficulty.

Thirty-five-year-old Julie from Holbeck in Leeds
found herself in financial difficulty when her
partner left.

She was paying off a ?500 loan through a home
credit company at ?30 a week at an annual per
centage rate (APR) of a staggering 490 per cent.

A credit union paid off the home credit loan with
its own loan set at 12.6 per cent. Julie was able to
repay the money at only ?6 a week and start
saving a small amount.

For details of credit unions in your area call 0161
8323694 or log on to the Association of British
Credit Unions website.