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High cost credit under the microscope

High cost credit under the microscope

Category: Loans

Updated: 14/12/2012
First Published: 20/07/2011

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The Government is to look into how a cap on the total cost of credit in the high cost credit market could affect consumers.

Following the launch of a review of the consumer credit and personal insolvency regimes last year, the Government said it received a substantial number of submissions asking for a cap on the total cost of credit that can be charged on products such as pay day loans to be considered.

With little hard evidence as to the impact this proposal might have, the Department for Business, Innovation and Skills has now commissioned additional research so that a thorough assessment of what the impact might be can be made.

Marie Burton, financial services expert at Consumer Focus, said hard-pressed consumers can end up in financial difficulties by taking out loans they can't afford, adding that better protection is needed to stop consumers falling into a debt trap.

"Looking into a cap on high cost credit and the potential impact is something we have called for and we welcome it," she added.

"But more is needed. The number of payday loans people can take out should be limited to five a year. If someone comes back for a fifth loan it should be seen as a sign that they need independent debt advice to stop them heading into financial difficulty.

"So many consumers using high cost credit underlines the need not only for high street banks to get better on small-scale borrowing but for a much bigger role for community-based alternatives such as credit unions and Post Office banking."

At the same time, Business Minister Edward Davey published the Government's response to the call for evidence concerning its review of debt advice and personal insolvency.

While pledging to make sure that debt advice is accessible to all, the Government said it is also committed to improving standards concerning debt management.

Following consideration of the responses received, the Government has proposed the Money Advice Service should perform a central role in the coordination of debt advice, and should research and develop a delivery model for debt advice.

It also wants to see the development of a protocol setting out what to expect from a Debt Management Plan, and the strengthening voluntary codes of forbearance where debtors need a breathing space to seek debt advice or recover from sudden income loss.

A consultation on how to facilitate access for bankrupts to a basic bank account is also in the pipeline, as is a consultation on increasing the petition debt level for creditors.

The current level of £750 has not been increased since the Insolvency Act 1986 came into force.

"We believe that to be able to threaten someone with bankruptcy for such a small amount is disproportionate," it added.

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