Consumers and lenders could do more to consolidate debts: OFT

Better financial awareness among consumers, and clear, accurate and relevant information from credit providers are required to make the use of debt consolidation fairer and more transparent, according to a study from the Office of Fair Trading (OFT) published today.

The OFT has estimated that, in 2002, £32 billion of unsecured lending and £8.8 billion of secured personal lending were used for debt consolidation. This compares with an estimated £18.4 billion of unsecured lending and £2.4 billion of secured personal lending in 1999.

The value of credit card balance transfers in the first 10 months of 2003 was £13.6 billion, compared with £11.6 billion for the whole of 2002.

Mori Financial Services (MFS) estimate that about 15% of all transfers involve consolidation of more than one credit card balance.

Debt consolidation occurs where a consumer takes out a loan or other credit agreement in order to pay off two or more existing debts. A variety of credit products can be used including: n unsecured loan; an advance from an existing mortgage provider secured against property but leaving the original mortgage intact; a second charge mortgage; a remortgage; or the transfer of balances to a credit card.

The OFT's main findings are that most borrowers do not shop around for credit for debt consolidation, although this can save money. Many borrowers, particularly those in financial distress, are unaware of other alternatives which are open to them, such as negotiating with creditors themselves or getting help from free debt counselling services, the OFT found.

The study also concluded that borrowers do not, in the main, give due weight to factors such as the length of the term of the loan and the total cost of repayments when deciding whether debt consolidation makes financial sense for them.

The study also identified "potentially unfair practices", such as lenders requiring existing customers to take out consolidation loans as a way of dealing with a debt problem, volume overrider commission arrangements for some credit brokers and approaches to lending which stress speed of decision and no "awkward questions" which may not be consistent with responsible lending.

These will be further investigated and may lead to appropriate enforcement action and/or further guidance, the OFT said.

Jonathan May, director of the markets and policy initiatives division of the OFT, said: "Many borrowers can benefit from consolidating their debts on better terms, but for others, there will be better alternatives. Our study has identified scope for further work by the OFT, the FSA and the government to improve regulation of consumer credit, and to increase financial literacy among consumers."

He added: "We intend to look at the scope for further guidance and where lenders or brokers are in breach of the regulations, we will not hesitate to take enforcement action.'"


Related UK National News Stories
Click here for the latest headlines.

17 December 2004
Consumer credit shake-up targets rogue lending
Tough new sanctions on rogue lenders could be introduced under a new Bill introduced in the House of Commons by Trade and Industry Secretary Patricia Hewitt. Measures in the Consumer Credit Bill would create a fairer, clearer and more competitive credit market, by bringing in new rules to give consumers better protection and more rights.
22 April 2004
Lenders warned over 'irresponsible' credit offers
Credit card companies have been warned that there will be no room for irresponsible lenders in the marketplace of the future. According to the Consumer Minister Gerry Sutcliffe, companies must improve data sharing to help promote "responsible lending" and crack down on those who exploit the most vulnerable borrowers.
24 February 2012
OFT Launches Payday Lending Review
The Office of Fair Trading (OFT) has today launched an extensive review of the payday lending sector. This is in part prompted by concerns that some payday lenders may be taking advantage of people in financial difficulty. The review will investigate compliance with the Consumer Credit Act and the OFT's guidance on irresponsible lending.
10 November 2009
Cash? That'll Do Nicely!
Shoppers across the UK are set to choose cash over credit for the first time in ten years this Christmas. According to a new report into spending habits, caution among consumers means they are using credit cards less A survey of 2,000 British consumers found that 68% had no plans to use any credit in the next three months.
17 February 2009
Misleading Advertisers 'Could Face Enforcement Action'
Businesses that mislead the public by claiming they can arrange for unpaid loans, credit cards or other consumer debts to be written off have been told to stop or face action, the Justice Minister has said.