Money Q&A: Can I bring First Direct to book?

In March 1997 I took out a three-year, pounds 5,000 personal loan with First Direct, arranged over the phone. I was told that if I did not take out loan insurance I could not get the loan. I'd never arranged a loan before and thought this was standard procedure. Now First Direct has sent me a letter offering an additional loan. The leaflet clearly states that loans are available without insurance cover.

I rang First Direct and was told it would never tell a customer that the loan insurance was mandatory. I said I was absolutely sure that I had been told insurance was a prerequisite of the loan. Initially First Direct thought it might be able to offer compensation but this offer was eventually withdrawn. I've since closed my First Direct account, but can I pursue the matter with any other authority? The amount is question is about pounds 600.

PL, email

To answer your specific query first, you would have to make a formal written complaint to First Direct. Once you have exhausted First Direct's internal complaints procedures you can complain to the Banking Ombudsman at 70 Grays Inn Road, London WC1X 8NB (phone 0171-404 9944).

Your chances of success are slim, since your evidence relies on a phone conversation that took place over two years ago. It would be your word against the bank's word.

But who knows, you might win. In any case, it is always worth complaining if you feel strongly enough - for the benefit of others if not yourself. First Direct would be required to defend itself and may be then inclined to tighten up its own procedures.

Furthermore, if the Banking Ombudsman receives enough complaints on a particular issue he may conclude that some action is needed.

He may raise the matter with the banking industry if too many customers appear to have misunderstood or misinterpreted the same thing. There is, though, an argument against complaining.

You could find dealing with the Ombudsman stressful, which would aggravate and prolong your frustration.

However, that depends on your temperament.

First Direct confirms that taking out insurance has never been a compulsory requirement when a personal loan is agreed. In fact most lenders make the insurance optional.

And anyone offered the insurance should think very carefully before agreeing to pay it. It is invariably expensive and can add significantly to the cost of a loan. Find out in what circumstances the insurance will pay out, how much it will pay and for how long. What if you are self-employed or on a short-term employment contract? You may find that it won't pay out if your work runs out, but you won't get a refund of premiums if a claim is turned down. Find out what alternatives you have.

For instance, do you have a generous sick pay scheme at work? If so, you may not need the insurance. Likewise, find out what sort of redundancy pay you would receive if you were unexpectedly made redundant. A lump sum pay-off might be more than adequate to pay off your outstanding loan.

Similarly, you may already have more than enough life insurance - or you may not need any life cover if you have no dependants.

Finally, watch out for the handful of lenders who do make loan insurance compulsory. Some manage to get to the top of the best-buy personal loan tables with competitive APRs. But when you apply for a loan you discover that you have to take out expensive insurance. The APR (annual percentage rate) was originally meant to take account of all unavoidable costs involved in taking out loans. The idea was that you could readily spot a loan's true costs and easily compare one with another. But it has emerged that compulsory insurance is a grey area and some lenders don't include it in the APR. They say you can have this loan at, say, 9.9 per cent APR plus insurance - but it's not compulsory because you have the alternative of a different loan at, say, 12.9 per cent APR without insurance. This really needs to be challenged, but trading standards departments seem reluctant to get involved.

And, by the way, the insurance may be even more expensive than it appears. Typically, a premium covering the full term of a loan is added to the loan. So you end up paying interest on the insurance premium.

Hybrid mortgage

I am in search of the best deal for shared ownership mortgages. Can you help?

SM, email

Shared ownership is a method of buying only a proportion of a property and of renting the rest. Shared ownership schemes are offered by some housing associations and are aimed at those who cannot afford to buy outright. They are funded by the Government through the Housing Corporation. Typically, you buy a 50 per cent share, though you may be able to go as low as 25 per cent or as high as 75 per cent. You can increase the proportion of the property that you are buying up to 100 per cent after moving in, and when you can afford to do so.

Some mortgage lenders, or their frontline staff, do not have much expertise with dealing with shared ownership and arranging a loan can be frustrating. Your best course of action is first to find a housing association willing to offer you a property. You need to meet the requirements of a particular scheme. An important requirement is that your income must not be below a certain level, nor above a certain level. So before presenting your financial credentials to mortgage lender, you have to present them to the housing association. Housing associations are likely to set other qualifications too. For example, you may be given priority if you live or work in the area where the association manages properties.

Once you have been accepted you are likely to find that the association will be able to give some basic mortgage advice and will usually be able to give you a list of mortgage lenders familiar with their scheme.

Alternatively, one of the larger mortgage brokers should have experience in this area.

Write to the personal finance section, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number; or fax 0171-293 2096; or email c.francis@independent.co.uk. We cannot give personal replies or guarantee answers to letters. We accept no legal responsibility for advice given.