BBC NEWS Americas Africa Europe Middle East South Asia Asia Pacific
BBCi NEWS   SPORT   WEATHER   WORLD SERVICE   A-Z INDEX     

BBC News World Edition
    You are in: Business  
News Front Page
Africa
Americas
Asia-Pacific
Europe
Middle East
South Asia
UK
Business
E-Commerce
Economy
Market Data
Entertainment
Science/Nature
Technology
Health
-------------
Talking Point
-------------
Country Profiles
In Depth
-------------
Programmes
-------------
BBC Sport
BBC Weather
SERVICES
-------------
EDITIONS
 Wednesday, 15 January, 2003, 05:33 GMT
Charities warn over debt pay-off schemes
A man looking at some bills
Consolidation loans can cost more in the long run

Consolidation loans and debt management firms can appear to offer a way out of financial crisis. But consumers should be wary of the quick fix, BBC News Online hears, in its week-long series on debt.
You have probably seen the adverts on daytime TV, and may even have been tempted.

A Z-list celebrity with a perma-tan says that the firm they represent will take away debt worries by shifting all your existing loans into one "easily affordable" monthly payment.

A major danger [with consolidation loans] is that people tend to look at how much they borrow not how much they will pay back in total

Meg Van Rooyn
National Debtline

The glossy advertising claims that poor credit histories, county court judgements or being retired or self employed do not matter as long as borrowers have a home against which the loan can be secured.

Consolidation loans typically give the impression that they are saving the borrower money - they seemingly offer a way out - but that is not always the case.

They usually spread the loan over a longer period, costing borrowers more in the long run.

Open in new window : Debt ridden Britain
How much do we owe?

And for some unlucky consumers the eventual cost of taking out one of these loans can be high indeed.

Repossession triggered

Consolidation loans are secured against property - fail to keep up payments and borrowers could lose their homes.

People can lose their homes for relatively small amounts - defaults of 5,000 or even less can trigger repossession.

The message from charities in the debt frontline is clear - borrower beware.

"We often see people that have taken out a consolidation loan," Meg Van Rooyn, information officer for National Debtline, told BBC News Online.

"A major danger is that people tend to look at how much they borrow not how much they will pay back in total."

We often see people that have used consolidation as a quick fix - they have cleared their credit cards and loans but soon it all just starts to mount up again

Meg Van Rooyn
National Debtline

In one case dealt with by National Debtline, a borrower was able to reduce their monthly outgoings from 300 to 150 per month, but only at the cost of having their repayment period extended by 10 years.

Quick fix

In addition, Ms Van Rooyn warned that by consolidating their loans, consumers were falling into the trap of paying double interest.

"When repaying a personal loan or hire purchase agreement, interest on the credit is included in the final settlement figure," she said.

"By taking out a consolidation loan another sum of interest is added on top."

What is more, consolidation does not get to the root of the problem that the borrower is spending more than they are earning.

"We often see people that have used consolidation as a quick fix - they have cleared their credit cards and loans but soon it all just starts to mount up again."

Call the management?

Debt management firms are seen by some as another fix for debt damaged Briton's.

The firms promise to act as a go-between the customer and their creditors in return for a fee.

They advertise in the national press and are sometimes referred to as credit repair firms.

However, many people are unaware that debt charities can offer similar services for nothing.

As a result, some debt management companies have been accused of exploiting vulnerable people.

Guidelines

In response, back in December 2001, the Office of Fair Trading (OFT) set out a series of guidelines for the debt management industry.

The OFT said firms should carry out a thorough review of clients' financial position, be upfront about their fees and not mislead consumers into thinking that their credit rating would automatically improve when the payment of their debts was complete.

Twenty pound notes and some coins
Debt management fees can mount up

The Consumers' Association recently mystery shopped seven leading debt management firms.

They found that all failed the OFT test in one or more ways.

In one instance the charges that the management firm would impose were larger than the debt repayments.

Business boom

However, Jackie Newton general manager of Chiltern debt management - one of the firms named in the Consumers' Association report - said that business was booming for good reason in debt ridden Britain.

"The debt charities can not cope with the cries for help - some Citizens Advice Bureaux actually refer clients on to us."

In short, the money people are paying to these firms would be better directed paying off debt

Yvonne Gallacher
Money Advice Scotland

Ms Newton equated the service offered by debt management firms to avoiding an NHS waiting list by having private healthcare.

"People find it extremely difficult to cope with creditors on a day-to-day basis - we take this job on for them.

"The fees guarantee ongoing service and we can have some success in getting lenders to reduce interest rates for their customers."

Yvonne Gallacher, chief executive of Money Advice Scotland, told BBC News Online that debt management companies offered little for the money.

"Free advice is the best advice," Ms Gallacher said.

"Unlike debt management firms charities can represent people in court, deal with local authorities and the taxman.

"In short, the money people are paying to these firms would be better directed to paying off debt."

BBC News Online is running a week-long series on dealing with personal debt


Debt busting

Analysis

FORUM

SLIDE SHOW
See also:

28 Nov 02 | Business
Internet links:


The BBC is not responsible for the content of external internet sites

Links to more Business stories are at the foot of the page.


 E-mail this story to a friend

Links to more Business stories

© BBC ^^ Back to top

News Front Page | Africa | Americas | Asia-Pacific | Europe | Middle East |
South Asia | UK | Business | Entertainment | Science/Nature |
Technology | Health | Talking Point | Country Profiles | In Depth |
Programmes