Debt consolidation

11 March 2004

The OFT fact-finding study into debt consolidation has found that better financial awareness among consumers, and clear, accurate and relevant information from credit providers are required to make the use of debt consolidation fairer and more transparent.

Download Debt consolidation (pdf file 312 kb)

The study was undertaken in the light of growth in the marketing and use of credit for debt consolidation. The study will also inform the OFT's enforcement of the Consumer Credit Act 1974 and the Regulations made under it, and developments in the regulatory framework governing consumer credit.

Findings

The OFT estimates that, in 2002, £32 billion of unsecured lending and £8.8 billion of secured personal lending were used for debt consolidation. This compares with an estimated £18.4 billion of unsecured lending and £2.4 billion of secured personal lending in 1999.

The value of credit card balance transfers in the first 10 months of 2003 was £13.6 billion, compared with £11.6 billion for the whole of 2002  - Mori Financial Services (MFS) estimates that about 15 per cent of all transfers involve consolidation of more than one credit card balance.

Key findings include:

• two thirds of borrowers who consolidated debts obtained information from only one provider, although shopping around can save money
• many borrowers, particularly those in financial distress, are unaware of other alternatives that are open to them, such as negotiating with creditors themselves or getting help from free debt counselling services
• 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.

The study identified potentially unfair practices, such as lenders requiring existing customers to take out consolidation loans as a way of dealing with a debt problem, volume overrider commission arrangements for some credit brokers and approaches to lending that stress speed of decision and no 'awkward questions' which may not be consistent with responsible lending. These will be further investigated and may lead to appropriate enforcement action and/or further guidance. 

The OFT also found a number of apparent breaches of credit advertising rules and will undertake a compliance review of credit advertising later this year.

The study examined evidence that payment protection insurance (PPI) for debt consolidation loans may sometimes be sold inappropriately to borrowers who are unlikely to be able to claim on it. The OFT will share the details of its findings with the Financial Services Authority, which is consulting on proposals for the regulation of the sale of general insurance, including PPI, for which it assumes responsibility from January 2005.

Recommendations

In the light of the study's findings, the OFT recommends that borrowers should 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
• if the loan is secured on their home, the consequences of not keeping up with payments and what happens if they want to move.

See press release

Background

The OFT anounced its fact-finding study into debt consolidation on 17 June 2003.

The study included a consumer survey, an analysis of complaints, and a review of advertising and marketing material for products which could be used for debt consolidation. The OFT also consulted consumer advice organisations, lenders, brokers and trade associations.

Announcement of study - see press release

Back to: Market studies