Unlike with a fixed-rate loan, lenders selling variable-rate deals do not have to quote a "total amount payable" figure, and trading standards officers say this is resulting in people being unaware of the full cost of a loan.
Double-glazing installers and agents for other home improvements are keen to arrange these loans, often making more in commission on the linked finance than they do from selling their own services, but often at the expense of higher interest rates for the borrower.
A local survey conducted by Leicestershire County Council's trading standards department found that seven out of nine double-glazing suppliers sold variable-rate deals, as well as a kitchen renovation company and a car dealer. In each case the APR, actual percentage rate of interest, was between 21.5 and 24.7 per cent - much higher than a typical personal loan of 15 per cent APR and more expensive, even, than most credit cards. All the lenders were divisions of major banks: Mercantile Credit (part of Barclays), Lloyds Bowmaker (Lloyds), First Direct (HSBC/Midland) and First National (Abbey National), as well as HFC Bank. Mercantile Credit says it has now left this market.
Trading standards officers believe that variable-rate credit agreements are often difficult for consumers to understand, leading them to pay too much for their loans. In particular they want an amendment to the Consumer Credit Act to require variable-rate contracts to include a total amount payable (TAP).
As rates on such loans change with interest rates generally, the figure would have to be a nominal one, based on the prevailing level. But it would assist consumers to understand the real long-term cost of a loan, say the officers. Variable-rate loans are often of 10 years' or longer duration, while fixed-rate deals are usually for shorter periods.
Variable-rate loan agreements are required to quote the APR, but many consumers do not understand APRs, say the trading standards officers. A quoted APR must include the interest charged and all administrative costs. Calculating an APR is very complex - the rules are laid out in a 20-page booklet published by the Office of Fair Trading - and lenders occasionally make errors in the calculations.
The structure and small print of these loans has also added a further layer of confusion in some cases. John Stanhope of Coalville in Leicestershire found his variable-rate loan considerably more expensive than he had expected. He borrowed pounds 6,600 seven years ago from Consumer Loans, consolidating several existing debts. No TAP was stipulated, but his repayments totalled pounds 10,367. Mr Stanhope says it was only when he had nearly completed the payments that he was told he had only paid off the interest due, and that the lump sum repayment of the capital amount was now payable on top. "I was gob-smacked," he says. "I would never have taken out an interest- only loan to pay off debts."
Consumer Loans was part of National Home Loans, which was rescued by the Bank of England. Kevin Allen, managing director of the NMB Group, which administers the remaining loan portfolio of Consumer Loans, says Mr Stanhope is one of several borrowers who signed up for interest-only deals believing they were paying off the whole debt as they went along.
The problem, says Mr Allen, lies with the brokers who sold the loans, not with the lender, which had no direct contact with borrowers. "The agreement does state that the capital is to be repaid on the date of the last monthly repayment," he says. This view is endorsed by NMB's local trading standards officers. Mr Stanhope could take legal action against the broker who arranged the deal for misleading advice, but this would involve one person's word against another. Trading standards officers believe that if Mr Stanhope's contract had included a TAP, a misunderstanding would have been unlikely.
The Office of Fair Trading says it is aware of the problems attached to variable-rate loans, which are worse if borrowers are "non-status" - high risk. Spokesman Graham Myles says: "You have to be on your toes to recognise all the charges, and whether there are any hidden charges."
The OFT announced last month that it is to conduct a review of the treatment of vulnerable people by the financial services industry, and that this will include problems with non-status loans. Trading standards officers are likely to ask for the review to investigate the rules covering variable- rate loans.