Debt Help

When Tony and Michelle Meadows first decided to borrow £5750 in 1989, the loan they obtained must have seemed like a godsend. At a stroke, the couple were able to pay off about £2,000 in mortgage arrears and carry out some much-needed improvements to their home.
But what the Meadows did not realise was how their debt was mounting up. Over the 15 years that they borrowed the money, the sum they owed grew remorselessly to more than £380,000, thanks to the “extortionate” 34.9% rate of interest they were required to pay. In effect, their debt was doubling again and again every three years.

Last week, a judge ruled that they did not have to pay the debt after all. “Where the rate concerned is as high as 34.9%, it seems to me that the combination of factors is so potentially exorbitant that it is grossly so and does grossly contravene the ordinary principles of fair dealing,” said Judge Nigel Howarth at the end of the hearing at Liverpool county court. “This is one of the few credit bargains which is extortionate.”

The ruling means the couple, from Southport, in Merseyside, will not be forced to sell their home to settle their debt to London North Securities.

But the case highlights both the growing seriousness of the UK’s soaring debt problem, as well as the practices of some lenders and debt collection agencies, which are making spectacular profits out of people’s indebtedness.

Personal debt is now at an all-time high, reaching £1000 billion in July this year, with every household in the UK now owing an average of 118% of their gross income through a combination of mortgages, credit card debts, overdrafts, loans and other forms of credit.

Lending and collecting this money is a massive industry, with thousands of companies ranging from the UK’s big high street banks to small local door-to-door lenders all claiming their share of the business.

The market itself is highly segmented with most borrowers dealing with big household names, often the banks, building societies and credit card issuers they hold accounts with. Although not all interest rates charged are high, profits are still massive: Barclaycard alone made more than £720m in 2003.

Many of the UK’s big banks are members of the Finance and Leasing Association, a body which groups together hundreds of members specialising in every area of credit activity, including car loans, cards and other forms of HP payments. In 2003, the FLA’s members “achieved” £89.7bn of new loan business, of which almost £65bn was to consumers.

In almost all cases, credit providers aim to operate responsibly – that is, they operate codes of conduct that should ensure debtors are not harassed by collectors, or forced to pay extortionate rates of interest. Instances where this does not happen are usually explained away as aberrations.

However, operating at a different level in the “sub-prime” sector, both in terms of the type of clients they reach and the rates of interest charged, are other branches of the credit industry, including doorstep credit providers. About 550 door-to-door lenders throughout the UK are grouped under the Consumer Credit Association (CCA) umbrella body.

This too is big business, with upwards of 28,000 mostly female doorstep collectors paying regulars visits to their borrowers throughout the UK. Provident Financial, one of the big three doorstep lenders, racked up profits of £87m in the first six months of this year.

Borrowing £300 from Provident Financial over 55 weeks would involve total repayments of almost £500, at an APR of 177%. This is considered cheap within the industry.

John Lamidey, director of the CCA, dismisses accusations of usury levelled against the industry. He claims a typical £200 loan over six months might cost £280 including interest payments, an effective APR of 258%. But a bank overdraft at an APR of 19.5%, in which only £10 a week is paid off, would see total payments of £273 over the same period. Of course, in most cases an overdraft rate would only tend to be charged for part of a month, when a person’s wages in the account are spent.

He stresses that the company associated with the Meadows’s debt problems, London North Securities, is not a member of the CCA.

Lamidey adds that unlike other so-called “sub-prime” lenders, members of the CCA do not continue to charge interest on outstanding loans if a debtor is unable to pay. “There is no point in simply adding on more and more debt to what a person already owes if they are already in financial difficulties."

The issue of growing interest charges is not one which affects members of the Credit Services Association (CSA), another trade body representing some 200 small, unquoted credit providers and debt collection agencies. Debt collection itself is now big business: in the past two years alone, the sums gathered by debt collectors in the UK rocketed by 70%, reaching £5bn from 20 million consumers in 2003.

So profitable is this area of business that a growing sub-sector involves members buying “loan books” off each other and then collecting the outstanding debts.

Around 40 or so CSA members are involved in this activity, with prices paid for debt ranging from a few pence for every pound of debt in the case of county or sheriff’s court judgements, rising to £1.50 for every £1 in more standard loan cases.

One source contacted by the Sunday Herald claims the willingness of some companies to buy debt at such a high price is down to two factors. “For one, you are paying on the basis of the interest you are aiming to collect from the debtor over the outstanding term of he loan. For another, the chances are that he will continue to remain your customer, so you are buying his future willingness to take on more debt.”

A CSA spokesman accepts that buying and selling debt is a growing phenomenon. He disarmingly adds that the UK’s debt mounting statistics are “frightening”. The problem, he feels, is of a major cultural shift in the way we treat debt: “My parents’ generation would never have borrowed money on the scale that we do today. But we now live in a ‘buy now, pay later’ world. If you are a student, you are already leaving college with debts running into many thousands of pounds, so it is easy to see how people become de-sensitised to debt.” However, the CSA also stresses that London North Securities, is not on its books as a member.

Although members of the CSA sign up to a code of conduct that requires them to “behave with integrity” and “respond sympathetically” to debtors with financial problems, this does not include foregoing compound interest charges on debt – charging interest on interest already owed. After three years’ non-payment, this is what led to the Meadows’ debt rocketing from £5750 to £380,000.

For the Meadows, salvation in court came from the judge’s decision to treat the interest they were being charged as “extortionate”, which allowed him to apply a section of the 1974 Consumer Credit Act and strike out the debt entirely. But a spokesman at the Office of Fair Trading, which polices lenders and credit agreements, points out that such a ruling only came about because, paradoxically, London North Securities took the Meadows to court to force them to sell their home and pay back the debt they owed.

By law, the OFT itself is not empowered to take lenders to court on the grounds that they are charging extortionate rates of interest – this must be done by the borrower.

“We are hoping that the Department of Trade and industry, which is reviewing this area, will include an amendment to allow us to take lenders to court on these grounds,” said a spokesman.

Yvonne Gallacher , chief executive at Money Advice Scotland, which provides free help to people with debt problems, says the number of people who do go to court and make such a claim anywhere in the UK is extremely small. “If someone is in debt, how are they going to be able to get legal representation? There are also restrictions on the amount of Legal Aid you can get.”

She says that until very recently, there were not even court forms available for anyone wanting to challenge an interest rate and that some sheriffs do not always allow money advisers to represent their clients in court.

Gallacher wants to see new laws introduced that would force lenders to give far more prominent explanations of what can happen to borrowers who default on a secured loan. She also wants them to show the effect of compound interest, the way debts can rise if they are not paid: “If they knew that, they would be far more empowered.”

The judge’s ruling, although the company has said it will appeal, and the level of publicity given to the Meadows’s case may help to hasten changes in the law.