FOOL'S EYE VIEW
Double Joy For Consumers

By Jane Mack (TMFJane)
July 24, 2003

There have been two announcements this week that herald some good news for consumers and not so good news for credit providers and retailers. Unfortunately, we'll still have to keep our eye on the ball if we're not to be ripped off.

First of all, there are to be changes to the ageing consumer credit laws which haven't been re-vamped since 1974. The Government has been consulting on these for about two years ever since they published their review document, Tackling Loan Sharks..and more. They've clearly decided it's finally time to act so they've brought forward their plans by announcing the publication of a White Paper in the Autumn.

The key changes will provide a fairer deal for people who want to settle personal loans early by abolishing the infamous Rule of 78 while the Office of Fair Trading will be given greater powers to examine the actions of lenders when their licence to operate comes up for review.

About 70% of borrowers pay off their loans early and the Rule of 78 enables lenders to frontload interest payments so that early settlement results in borrowers are penalised. For example, £10,000 repaid over 15 years at interest rate of 16% but paid off after only five years would cost an extra £1,300. Lenders will now have to use a more accurate formula to calculate the balance owed and will only be allowed to charge one month's interest. They will also have to give examples at the start of a loan of what early re-payment penalties will apply.

Extra powers to review lenders' licences should result in tighter controls over those who tend to skate on thin ice when it comes to conducting their business. Thirty-odd years ago there were only 2,500 licensees – now there are 215,000 which makes it more difficult to keep track of lending practices.

Other changes include a co-ordinated nationwide money advice service and the ability to fully sign-up for credit agreements online.

The Consumers' Association has cautiously welcomed the proposals although it would have preferred some clear proposals to tackle loan sharks who, they say, affect one in five adults and cost the economy around £16 billion a year. The abolition of the Rule of 78 was also welcomed although they say the Government's solution is far from ideal. A ban on any early repayment penalties would have been better.

As always the devil is in the detail but we'll have to wait until the Autumn to see the specific white Paper proposals. It's hard to recall just how different things were thirty years ago but if you think that in 1969 there was only one type of credit card on the market and that now there are more than 1,300, it's a wonder the consumer credit laws haven't been tackled before.

The future of how extended warranties are sold also came under scrutiny this week when the Competition Commission published its consultation document designed to curb retail sales tactics.

Their proposals include clearer pricing on warranties, a cooling off period for those buying then and the provision of better information on statutory rights.

The inquiry is the result of a report from the Office of Fair Trading a year ago complaining about the monopoly which certain retailers appeared to have in the market and concluding that self-regulation of the industry had failed.

The Competition Commission stopped short of agreeing there was a monopoly and still intends to leave the market largely self-regulated although their proposals are at least a step in the right direction.

As the Consumers' Association remarked:

"As with warranties Consumers' Association recommends that everyone reads the small print of this announcement. While the proposed remedies do not go as far as we would like, they will still fundamentally change the sales process for warranties and make it considerably more difficult for retailers to sell poor value warranties."

We've said it before and we'll say it again, for the most part extended warranties are a waste of money and people would be much better of self-insuring. Remember that you almost always have the manufacturer's guarantee for at least the first year so save the insurance premiums yourself and you'll invariably find that if one of the many electrical good does break down, you can pay for repairs yourself. It's likely to work out much cheaper.

Find out more about Personal Loans; The Rule of 78; Just Say No to Extended Warranties