Citizens Advice Scotland (CAS), the umbrella body for Citizens Advice Bureaux in Scotland, has endorsed a report released today by its sister-body for England & Wales on extortionate credit.
The National Association for Citizens Advice Bureaux (NACAB) is warning that loopholes in the law and public confusion over borrowing are allowing some lenders to trap people in extortionate credit.
The report, Daylight Robbery, is based on evidence from over 100 CABx throughout England & Wales, uncovers cases where interest rates of up to 1834.3% APR are being charged. In other cases, people will have to pay up to ten times the amount originally borrowed to pay off their loan.
And CAS, which intends to publish its Scottish findings in the new year, warns that the situation is just as shocking north of the border. Last year alone, Scotland's 57 frontline Bureaux dealt with debt enquiries totalling £60m.
The NACAB report also slams the terms of many credit deals as heavily weighted in favour of lenders, who can put themselves in a ‘win-win' situation, for example by insisting loans are secured on a borrower's home and charging sky-high interest rates normally associated with high-risk lending.
A range of credit products and agreements are involved, but the biggest problems fall into four key areas:
lending secured on people's homes, particularly loans consolidating other unsecured debts;
lending to people on low incomes;
lending tied to the sale of cars, windows and kitchens;
lending to people with impaired credit records.
Daylight Robbery argues that existing legislation on extortionate credit must be strengthened. At present, the legal test to determine whether an agreement is extortionate is too heavily weighted in favour of lenders and can only be invoked if an individual borrower is prepared to risk heavy legal costs in taking court action. As a result, the law is seldom used.
NACAB - alongside Citizens Advice Scotland - is calling for urgent reforms that strike a better balance between the legitimate commercial interests of creditors and protecting consumers from abuse.
It recommends changing the law so that a credit agreement is held to be extortionate if it requires payments that are excessive, given the degree of risk taken by the lender, in providing the loan, or if the agreement contravenes the ordinary principles of fair dealing.
It also wants courts to be allowed to consider whether a credit agreement is extortionate, without the need for an application from the borrower, and recommends that specified third parties should be able to initiate extortionate credit applications on behalf of borrowers.
Other recommendations include:
clear information in credit agreements about the likely actual cost of repaying money borrowed, and the cost of alternative options;
an obligation on the part of lenders providing ‘consolidation' loans to recommend that borrowers get independent advice on alternatives to taking on additional credit;
a requirement that lenders providing loans secured on property must prove they took all reasonable steps to assess the borrower's ability to repay the loan.
NACAB chief executive David Harker commented:
"While credit has played a part in raising general standards of living, the downside has been that more and more people are turning to Citizens Advice Bureaux because, for them, high cost credit has turned into serious debt. Low income consumers who can least afford it are paying the price of inadequate controls."
CAS chief executive Kaliani Lyle backed his warning:
"Unfortunately, the NACAB report mirrors the experience of too many Scots, who find themselves caught in the same trap. Our own report next year will reinforce the need for urgent action to stem this particularly nasty example of rip-off Britain."
Key facts:
In 1979 consumers could choose from only a handful of credit cards; now there are around 1,300;
Since 1979, total unsecured consumer credit in the UK has increased elevenfold;
In August 2000, the amount of unsecured consumer credit outstanding in the UK stood at £122bn.
Key tips on how to avoid the extortionate credit trap:
Don't make the common mistake of looking only at the monthly payments required under a credit agreement – take into account additional interest payable.
Work out the total amount payable over the term of the loan – bearing in mind that with some loans you may be paying a variable interest rate.
Shop around and compare terms on other loans
Think twice before taking out a consolidation loan to manage other debts. You may be able to arrange to pay back existing debts over a longer period of time - at less cost and less risk than a new loan.
Get independent advice – this is free at your local Citizens Advice Bureau.
Make sure you know the difference between secured and unsecured lending, and don't put your home at risk unnecessarily.
Find out about alternative sources of borrowing – is there a credit union you could join in your neighbourhood or workplace?
Do your homework; spending time shopping around, researching what's on offer and getting advice may seem more than you can afford when you need a loan quickly, but if you skip this vital part of the process, you could be paying the price for years to come.