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After eight months the Office of Fair Trading (OFT) today published the results of their study into Debt Consolidation. Whilst many have focused on the alleged misdeeds of some brokers and lenders, the reality is that in most cases if borrowers are losing out (or not making the additional interest savings they could) from consolidation, it will actually be their fault.

Whilst the study did identify a number of “potentially unfair practices” including possible breaches of credit advertising rules, lenders requiring existing customers to take out consolidation loans with them as a means of dealing with their existing debt problems and the use of volume overrider commissions, where brokers get paid extra commission for generating volume, these only affected a minority of consumers.

UnProtection Insurance

The “inappropriate” selling of Payment Protection Insurance (PPI) policies was also addressed. Given the caveats that can often apply to such policies, it is vital to check the small print before signing.

For most people PPI can offer valid protection against accident, sickness, unemployment and death. Standalone PPI policies can prove a wise alternative given their greater flexibility. They usually provide greater scope to be tailored to your own circumstances and can be used to cover outgoings other than loan repayments.

The PPI cover sold with most loans, particularly secured loans, tends to be block cover. Block cover is where you pay for the complete life of the policy up front, meaning you are in effect taking out an extra loan just to pay for it.

Moreover, the average PPI cover on such loans is about 13% of the loan amount. This means refinancing a loan with PPI at a later date can be a very expensive process. Borrowers on a typical 25-year loan with joint cover are often faced with still owing more than the original consolidation loan when they come to refinance 5 years in.

Borrowers The Biggest Problem

According to the study two thirds of those taking out consolidation loans obtained information form only one provider. The majority of debtors being unwilling to shop around even though, the OFT admits, “shopping around can save large amounts of money”.

Another indication of the abuse of consolidation loans by debtors is that 56% also borrow additional money at the same time. Whilst some of these additional borrowings can be attributed to legitimate expenses, in most cases it is simply the debtors using the excuse of lower payments to get even further in debt.

“Many borrowers see debt consolidation as an easy short-term solution to multiple debts and a way of obtaining more credit”, the OFT conceded. In such circumstances the fault is not with the lender but with the borrower, for it is the borrower who is abusing the facility by not utilising it as he should.

The OFT study urged lenders to provide consumers with more and clearer information in order that they can determine how suitable the consolidation loan is. However, they also accept that they need to address the lack of financial literacy amongst consumers.

Debtors are often unaware of what options other than consolidation loans are open to them. Directly contacting creditors, debt management plans and IVAs are all possible options for those with unmanageable debts.

Jonathan May, director of the markets and policy initiatives division of the OFT, said “Many borrowers can benefit from consolidating their debts on better terms, but for others, there will be better alternatives”.

Initiatives, such as the new OFT consumer education team, established to improve consumer knowledge of credit and debt, are admirable. But how effective they will be will depend on how willing consumers are to utilise them.

Responsibility

Consolidation offers the debtor the opportunity to take back control of their debts. To establish a monthly repayment and term which fits their budget. Indulging in yet more borrowing or extending the term so as to have the smallest monthly repayments, thereby enabling the debtor to have more money left over to squander on anything other than actually getting out of debt, is irresponsible.

The OFT raised the subject of responsible lending in the study. Responsible lending is about determining whether a prospective borrower should be able to afford the repayments. After all, money lenders only profit if those they lend money to can afford to pay it back (with interest).

More important is the subject of irresponsible borrowing. If it were only the financially responsible and credit smart who were borrowing money, the amount of consumer debt would be drastically lower and the lenders would not be the current whipping boy of media and politicians.

No matter how many mail shots are sent out and television ads are aired, the ultimate decision lies with the consumer. It is up to the consumer to ensure that they make an informed and responsible decision when determining how best to manage their debts.

Interest Rates are back on the agenda. After the expected rise to 4pc in February, all the pundits and economists figured rates would remain unchanged until May. But with the latest borrowing figures showing net lending at a massive £10.6bn for January and house prices up by 3.1% in February, according to the Nationwide Building Society, there is speculation that rates could go up on Thursday when the Bank of England concludes its monthly meeting.

Whilst the Bank of England’s Monetary Policy Committee (MPC) is desperate to curtail the endless credit bingeing they’re only weapon, raising interest rates, is proving ineffective. Money is still cheap to borrow and if the repo rate is only expected to rise to 5.5% int he current cycle, only those who have mismanaged their borrowing or experienced a sudden change in circumstances will fall foul.

The problem with the raising-rates strategy is that it is already hurting manufacturing as money becomes more expensive. It is damaging exports and causing the pound to strengthen, which given its appreciation against the dollar it doesn’t need any help with. The strong pound is filtering through to inflation, despite the Government’s adoption of a different system designed to exclude housing costs and Council Tax, which leaves the MPC with the only option to raise interest rates.

Now, ironically enough, there is talk about the European Central Bank (ECB) reducing their rate on Thursday. Admittedly the ECB is two years behind the rest of the world and is still trying to play catch-up after having crippled the German and French economies with a strategy of too-little-too-late.

Normally the British approach to problem solving, The ECB’s procrastination has been the salvation of the United States economy and has allowed them and the United Kingdom to grow at the EuroZone’s expense. Who knows the depth of recession the U.K. could have been in if we had been part of that singularly mis-managed currency?

The MPC can’t afford to raise rates, especially if there is the possibility that the ECB could cut theirs. That would cause more problems for exporters and manufacturers. Which means that the forthcoming Budget could well throw up a nasty surprise or two for borrowers, and homeowners in particular, as an alternate way to halt the borrowfest is searched for.

Interest rates have long been considered to have a taxing effect on people’s incomes. It isn’t tax but it takes money out of, and puts money in to, your pocket the same way tax cuts and hikes do.

If upping the interest rate isn’t having that staunching tax-like effect, then Chancellor Gordon Brown will have to look at actual taxation as a way to putting an end to the habit of consumers using their free will to do exactly what they want . . . get into debt.

It is not like the Chancellor couldn’t do with the extra money. The escalating borrowing and budget shortfalls means that he could do with a windfall. He might complain about consumers borrowing too much, but his recent track record isn’t any better.

He could go directly after homeowners, but would have to be careful. As far as voters are concerned, new or higher taxes are only acceptable if they impact on those who are seen as richer than themselves. Truly democratic taxes, where everyone pays the same, tend to be unpopular.

There is still the goal to bring taxes in line with Europe. Stamp Duty on house purchases is one that is slowly being nudged in that direction. But with a level of around 15% or so as the target for the largest properties, any substantial increase would not be well received. Not something you really want to do with the local elections coming up.

Removing the absence of Capital Gains Tax on the profit you make when you sell your main residence may be one tactic. But there would need to be a raft of rules and caveats to protect homeowners from being unfairly taxed just because they happen to move home when house prices have risen.

As a way of raising tax revenue it wouldn’t raise much. Moreover, it would likely reduce the number of houses on the market and so actually drive house prices up.

Whilst it is the small percentage of truly overindebted who are grabbing the headlines, the bottom line is that the Great British public collectively need to borrow less and save more. If rising interest rates aren’t working, then it may just have to be taxes. The question is, which do you prefer?