Consumers unclear over high-APR loans causing debt problems

09/12/2009

The Office of Fair Trading (OFT) has updated its ongoing review of high-interest loans, indicating that a "significant number" of consumers are dependent on using the credit to meet day-to-day costs.

Initial results from a "behavioural economics" study conducted by the organisation suggested that the main attraction of the loans was that the application process was much shorter than that for high street credit.

However, the high APRs attached to the products can cause spiraling debt problems, especially if borrowers use the credit to fund essential spending such as rent, groceries and energy bills.

Tighter high street credit criteria has led to more customers turning towards high-cost credit over recent months.

The OFT also found that there was "limited evidence" suggesting that these borrowers shopped around for the best deal - meaning that they might be paying even more than is necessary, worsening their money problems and increasing the likelihood they will need to seek out debt help in future.

"Information on the total repayment amount is more helpful than an APR in understanding the cost of short-term credit," the OFT said.

"[Behavioural economics] evidence showed that some consumers do not always understand APRs and may sometimes use them incorrectly when making comparisons between very different products."

Kevin Still, EuroDebt director, added: "We welcome the review and the need for more transparency in the costs of credit and the penalties associated with breaking contractual terms, which can be very costly. For people already in debt problems, we do not recommend servicing existing borrowing with further more expensive credit that may cause a debt spiral.

"Non-borrowing debt solutions, like Debt Management Plans (DMPs) should be considered alongside applying for further credit. Managed solutions may be more suited to those who rate their budgeting skills as weak and have many unsecured creditors where payments may have been missed."

The OFT will release a completed report on the issue in 2010.

Tags; Debt Management and Banking, Credit Card Lifestyle, Recent Graduate Debt,

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