New year, new debt

Debtors may find themselves paying back far more than originally anticipated.

As families recover from New Year celebrations, debt advisers are expecting the number of inquiries they receive this January to hit a new record. The BBC's personal finance reporter, Andrew Verity, investigates.

The government is reviewing laws meant to protect borrowers from bad practice by lenders - laws which are widely perceived not to work.

In evidence to that review, debt advice agencies are warning of deals offered by many lenders which appear to make life easier for the debtor - but in fact cause them to pay back much more than they need to.

Many people are turning for help in repaying debts.

One such person is Caroline Borgust - she has some serious money troubles to think about.

She took out a £5,000 loan to consolidate her debts in 1989. After running into some minor arrears, she consulted a Citizens' Advice Bureau (CAB) 10 years later - and found she had already repaid £17,000.

When she asked the lender how much it would cost to settle it, she was told she would have to pay another £20,000.

Caroline is just one of nearly 700,000 people who turned to CABs for help in repaying debts last year, an increase of 46% on three years ago.

Debt advisers such as Sophie Brooks of National Debtline know just how tough the struggle is for her clients at this time of year.

One of Sophie's most important pieces of advice for worried borrowers is to stay in touch with their creditors.

If repayments seem unaffordable, many lenders will accept a part payment.

But there is increasing evidence that some lenders are only too happy for the bulk of a debt to be left unpaid.

Ian McQueen Sims of the research firm Check Limited found that by reducing the minimum payment they will accept, credit card companies are boosting their profits.

Whereas in the US, the minimum monthly payment is typically 5% of the debt, lenders here allow borrowers to pay back as little as 2%.

At 5% a month, a £1,000 credit card debt would take just under six years to repay.

With a lower repayment of 2%, it would take 32 years.

Worse, with the lower repayments the total amount paid back more than doubles, from £1,400 to £3,600.

Evidence like this is being used to support growing calls for the government to reform the Consumer Credit Act, created to protect borrowers in 1974.

The consumer credit industry is now 11 times as big as it was then, and debt advisers say the law must be tightened to control it.