Mar
11
Debt Consolidation: Who’s to Blame?
Filed Under News
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.
