Borrowers find it's pure hell being good

The devil's still in the detail, says Melanie Bien, as penalties for early repayment of loans survive a Government shake-up

With debt spiralling out of control in the UK and predicted to top £1 trillion within days, new rules are being introduced to ensure borrowers receive clear information about credit cards and personal loans - before they sign up for them.

With debt spiralling out of control in the UK and predicted to top £1 trillion within days, new rules are being introduced to ensure borrowers receive clear information about credit cards and personal loans - before they sign up for them.

Consumer minister Gerry Sutcliffe last week announced the Government's latest shake-up of the credit market, tightening up the way in which credit cards and personal loans are advertised to make it easier for people to compare products.

But while such a move is welcome, consumer groups argue that it doesn't go far enough. The Government has refused, for example, to abolish the practice whereby lenders penalise the 70 per cent of British borrowers who repay a loan early, even though clearing your debts should be encouraged.

Instead, the maximum that lenders can charge for early repayment will be reduced from two months and 28 days' interest to one month and 28 days' interest.

But because this practice won't be abolished, many consumers will be tied into expensive deals and discouraged from switching to some of the lower-rate loans that are frequently being introduced.

However, illustrating how important it is to shop around when choosing a loan, some lenders don't impose a penalty for early repayment. These are American Express, Bank of Ireland, Barclays, Egg, Intelligent Finance, Leeds & Holbeck, Nationwide, Newcastle, Northern Rock, Virgin Money and the Woolwich.

The National Consumer Council (NCC) also criticises the decision to implement the new regulations some way into the future. On existing loans of up to 10 years, the new limit will be introduced from May 2007, and for loans over 10 years it will apply from May 2010.

"[Borrowers] will have to make an extra month's worth of repayments and pay an additional one month's interest," warns Ed Mayo, chief executive at the NCC. "For vulnerable borrowers on weekly credit payments, this means an extra four instalments plus interest. This is just not good enough."

The Consumers' Association (CA) agrees that implementation should be brought forward. "The deadline of 2010 ... should be made much earlier to benefit disadvantaged consumers who need to spread their payments over a longer period," says Doug Taylor, campaign team leader of the CA.

The Government's new rules also address annual percentage rates (APRs), which many consumers use to compare credit cards - even though they often have no real value as different lenders work them out in differ- ent ways. This is set to change, with a standardised APR calculation to be used for credit cards and loans.

In advertising, APRs will have to be displayed more prominently than all other financial information: they can't be buried away in the small print. This change will be introduced to credit advertising from 31 October.

But the CA remains concerned that several issues have not been addressed, including a code of conduct for credit scoring and the impact of risk-based pricing on the vulnerable. "The devil's in the detail," says Mr Taylor. "We're concerned the proposed laws may not go far enough to address confusion."

One issue on which the Government has backtracked is the introduction of "honesty" or summary boxes on credit card statements. These are supposed to provide a clear snapshot of the main charges and fees, and the industry in general has expressed its commitment to providing them.

Some card companies are already including the boxes on their statements but the Government has decided not to make them compulsory. This means the information provided is unlikely to be standard and will therefore be of limited use in enabling consumers to compare the cost of products.

"Yet again it is down to the consumer to be completely vigilant and scratch beneath the surface to see whether a product is all it seems," says a spokesman at internet bank Egg. "You could question whether the consumer should have to do that."

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