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Last Updated: Friday, 29 October, 2004, 10:29 GMT 11:29 UK
Q&A: 'Extortionate' debt ruling
Tony and Michelle Meadows
Tony and Michelle Meadows: A "ton of weight" has been lifted

Tony and Michelle Meadows, a Merseyside couple who faced having their home repossessed after a 5,750 loan snowballed into 384,000, have had the debt wiped out in a legal judgement. What does this ruling mean for people facing similar debts?

I'm heavily in debt. Does this ruling mean I can stop repayments?

Unfortunately not. You must continue to keep up repayments on any loan or other credit agreement.

If the loan is "secured" against your property, you could lose your home if you do not keep up payments.

If you are struggling to keep up with payments, it is important to continue talking to your creditors and seek professional help from a debt advice charity.

So what does it mean for people in debt?

The ruling is a huge symbolic victory for critics of unfair credit agreements.

Each year, thousands of borrowers - many of them on low incomes - find themselves in financial dire straits, because they are struggling to pay back loans charging extortionate rates of interest, which can be as high as 300%.

The judgement, however, does not set a "legal precedent" - it will not automatically apply in similar cases.

CONCERNED ABOUT DEBT?
National Debtline: A free, confidential and independent service funded by the Department of Trade and Industry and the credit industry. Tel: 0808 808 4000
Business Debtline: Provides a free telephone debt counselling service for self-employed and small businesses, funded by banks. Tel: 0800 197 6026
Consumer Credit Counselling Service: Funded entirely by the credit industry, the service offers advice to people in debt. Tel: 0800 138 1111
Citizens Advice: Offers free, independent and confidential advice from more than 700 locations throughout the UK. Tel: 0207 833 2181

The fact that the case has achieved such high national prominence could however influence other judges in similar cases.

It could also serve as a warning shot to credit lenders who charge exorbitant interest rates.

How do people get themselves into this position?

The 34.9% Annual Percentage Rate (which refers to the interest rate plus other charges) charged on the loan taken out by the Meadows in 1989 was "compounded".

This meant the Meadows were charged 34.9% interest on the arrears as well as on the repayments. As they struggled with repayments, the debt snowballed to 384,000, 67 times the original amount.

Unfortunately, the Meadows' experience is not uncommon. Compound interest charges are a common feature of credit agreements.

Borrowers can also incur an array of other charges, such as arrangement fees and penalty charges, which can add to the original debt.

If a debt collection agency is involved, further charges will be added.

Should lenders face tougher rules?

The case has not gone unnoticed by the Department of Trade and Industry, which is currently undertaking a review of the UK's 30-year-old credit laws.

It is in the middle of drafting new legislation which would make it easier for consumers caught in unfair credit agreements to challenge lenders.

One proposal is the creation of a new "lending ombudsman", which would be run by the existing Financial Ombudsman Service.

The proposed dispute resolution service would allow consumers to challenge credit agreements without the worry and expense of going to court.

In addition, the government is expected to make it easier for consumers who do wish to challenge credit agreements in court.

Consumers who want to challenge a credit agreement must currently prove it is "extortionate" before a court can look at their case.

The new rules would introduce a broader "fairness" test, making it easier to sue.

Other changes, coming in on Sunday, will strengthen the rules on credit advertising.

Under the changes, the APR must be more prominent than all other financial information.

It will also become an offence to conceal the true cost of a loan in the terms and conditions - companies that flout the rules could lose their consumer credit licence.

If I am concerned about debt, who should I turn to?

With more than 1 trillion owed by UK consumers on credit cards, loans and mortgages it is not surprising that the debt explosion has fuelled a burgeoning debt management industry.

There are a whole host of companies offering "quick-fix" solutions to debt problems for a fee.

However there is no need to pay, as there are a number of charities, such as National Debtline, offering free debt advice.




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