Borrowers whacked by a helping hand: Consolidation loans that are targeted at the needy can cost a bundle, says Maria Scott

A LOAN with an interest rate of more than 65 per cent and an arrangement fee of pounds 75 sounds like the sort of deal you might expect from a back-street broker.

But these are terms being offered unashamedly by National Westminster Bank for 'consolidation' loans intended to assist people who are financially stretched.

NatWest introduced its consolidation loan in May 1991, although it has not exactly shouted it from the rooftops.

An Independent reader was outraged when his daughter was offered one after asking the bank to extend her agreed overdraft limit.

The loans have a nominal rate of interest of 27.5 per cent. The arrangement fee is 2 per cent of the amount borrowed, although the minimum is pounds 75. When this fee is added to the interest charges to work out the annual percentage rate - intended to show the true cost of borrowing - the total can look astronomical.

The reader's daughter was quoted an APR of 65.3 per cent for a pounds 653 loan to be repaid over 12 months. The woman only wanted to borrow pounds 600, but the bank insisted that she buy an insurance policy for pounds 53 to cover the repayments if she lost her job with a local authority.

Her father was so annoyed when he found out about the deal his daughter had been offered that he loaned her the money himself.

She explained that she had originally asked her branch in Wrexham for a small extension to her automatic overdraft limit, operated under the bank's 'credit zone' scheme, because she needed to pay for some car repairs.

She and her husband bought a house recently and have been more financially stretched than normal.

Her credit zone limit was, as she recalls, about pounds 550. She said the bank refused to extend it, and she breached the limit. The bank started levying charges, so she applied for a loan of pounds 600.

NatWest then offered the consolidation deal.

'I was just lucky that I had somewhere else to go for the money,' she said.

'I have now closed my account. Yorkshire Bank has accepted me.'

She said that the bank never invited her to go into the branch to discuss her finances in detail.

NatWest confirmed the terms of the loan offered to the woman. The 27.5 per cent nominal rate has applied since the scheme was launched.

A spokesman said the APR was high in this case because the loan was over a short period, was for a small amount and bore the minimum arrangement fee of pounds 75.

The point to focus on, the spokesman insisted, was that the nominal rate on the consolidation loan was lower than the 33.25 per cent charged for an unauthorised overdraft, which is how the woman was borrowing when she breached her credit zone limit.

Consolidation loans 'attract a premium rate' because the loans are considered higher risk than an ordinary personal loan or overdraft, said the spokesman.

Asked why the woman could not have been helped over her difficulty by extending her overdraft (21.5 per cent APR when authorised) or offering her a conventional personal loan (23.4 per cent APR on the amount she wanted to borrow), the spokesman said the branch would have offered what it thought was appropriate.

Of the other main banks - Barclays, Midland, Lloyds, TSB and Abbey National - only Barclays admitted to having a consolidation loan scheme similar to NatWest's. However, the terms are different. The arrangement fee is 1 per cent of the amount borrowed - with a minimum of pounds 25 - and the nominal interest rate for an unsecured advance would be 24.95 per cent. On a secured loan it would be 21.95 per cent.

Barclays calculated that the APR on a pounds 653 unsecured consolidation loan over 12 months would work out at 33.2 per cent. The bank could not comment on the circumstances in which such a deal would be offered. 'This would be up to the manager's discretion,' said a spokeswoman.

TSB said someone with short-term borrowing needs would normally be offered a personal loan - 25.9 per cent APR on amounts up to pounds 2,000. The bank said it would interview someone seeking this sort of help.

Midland also said it would probably offer a conventional personal loan. Lloyds said it could not be specific but it did not have a consolidation loan scheme and would probably satisfy extra borrowing needs out of its normal overdraft and personal loan facilities.

Abbey National said it was not keen on the idea of customers taking out loans to clear other debts. However, where it thought this could be justified, it would offer a conventional personal loan.

(Photograph omitted)