Debt consolidation

Launched: June 2003

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Purpose of the study

To provide better knowledge and understanding of the nature of debt consolidation, the types of credit product involved the kinds of consumer who consolidate their debts and the issues that may arise.

(Study followed in-house work.)

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Findings

The findings showed:

1. Potentially unfair practices, such as lenders requiring existing customers to take out consolidation loans as a way of dealing with a debt problem.

2. Two thirds of borrowers who consolidated debts obtained information only from one provider, although shopping around can save money. Many borrowers, particularly those in financial distress, unaware of other alternatives, such as negotiating with creditors or free debt counseling.

3. Borrowers do not in the main give due weight to factors such as the length of the term of the loan and the total cost of repayments when deciding on debt consolidation.

4. A number of potential breaches of credit advertising rules.

5. Evidence that payment protection insurance for debt consolidation loans may sometimes be sold inappropriately to borrowers who are unlikely to be able to claim on it.

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Recommendations

The recommendations of the study were:

1. An OFT compliance review of credit advertising.

2. Investigations into potentially unfair practices found to see if enforcement action/further guidance required.

3. Advice to borrowers to consider:

• what debt consolidation is and what the alternatives are
  
  
• what the interest rate and APR is and whether it is variable
  
  
• what the overall cost of the loan is
  
  
• what the monthly repayments are
  
  
• whether there are additional features which will change the rate at which the capital sum is paid back
  
  
• what will happen if they miss a payment
  
  
• what happens if they want to repay or refinance early, and
  
  
• if the loan is secured on their home, the consequences of not keeping up with payments and what happens if they want to move.

4. OFT to consider how far problems relating to transparency and responsible lending can be addressed through trade association codes of practice and OFT guidance on fitness to hold a credit licence.

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Action following market study

• In November 2004: OFT launched campaign on consumer credit. 'Consumer education: a strategy and framework' providing a framework for the 600 plus organisations involved in providing consumer education in the UK. 
  
   
• In July 2005: The Debt Managers Standards Association became the first debt management trade association to successfully complete Stage One of the OFT's Consumer Codes Approval Scheme.
  
  
• In July 2009 the OFT launched a consultation on draft guidance settling out practices the OFT considers constitute irresponsible lending: see press notice

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Market study details and report

Download OFT fact-finding Report 'Debt consolidation'  March 2004 (pdf file 312 kb)

See press release 'Debt consolidation under OFT spotlight: OFT publishes fact finding study' 11 March 2004

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Background information

Announcement of study - see press release 'OFT launches study into debt consolidation' 17 June 2003

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