Extortionate interest rates and unfair hidden charges on loan agreements will be outlawed under a government White Paper published tomorrow, which will herald the biggest shake-up of the credit industry for 30 years.
The Office of Fair Trading will be given new powers to vet those who go into the money-lending business, with more stringent investigations into their backgrounds and fines for those who mislead or overcharge borrowers.
Patricia Hewitt, Secretary of State for Trade, also intends to compel lenders to present agreements in a clear, standardised format, so that borrowers will be warned about charges and penalties they could run up, and will be able more easily to compare one loan agreement with another.
The White Paper is also expected to announce the scrapping of the decades-old "Rule 78", which allows finance companies to impose heavy penalties on borrowers who pay off their loans early, making them pay most of the interest that would have been due if they had kept the loan for the full term.
The Consumers' Association has called on the Government to set a limit of one month's interest on penalties for early payment, so that it pays borrowers to get out of debt.
Interest rates can also vary wildly in the jungle that is the current credit market. It is possible to go on to the internet and raise a large loan at an annual rate of 6 per cent, or to pick up a store card charging a rate four times as great.
The competition for customers from 1,300 credit cards is so intense that in one instance a dog named Monty, living in Manchester, received an offer from the Royal Bank of Scotland for a gold card with a £10,000 spending limit and free air miles.
But while potential customers are deluged with offers of easy credit, many are little better informed than Monty the dog about what they are actually signing when they enter into a credit agreement.
Almost 60 per cent of borrowers do not even know what an APR is, according to a Mori survey for the DTI, and four out of five of those surveyed wished they knew more about their rights as lenders.
Calls for an update in the law have been supported by banks, and consumer groups. Richard Mason of moneysupermarket.com said: "Before buying, consumers should check they are not being forced to take insurance for payments, that there is no redemption penalty on any existing loan and if they are concerned about interest rates going up, that the rate they are offered is fixed."
Ms Hewitt said: "Consumers are often bombarded by complex loan offers and confused by reams of small print. The UK's credit laws are long overdue for reform."Reuse content