Consumers who are struggling with their finances and are thinking about appointing a debt management company to help them get out of debt – by re-negotiating terms with their creditors – have been warned to be aware of the charges involved in the process.

A report issued by Money Advice Trust has revealed that many debt management companies are guilty of poor practice.  Its report was based on research carried out by the Personal Finance Research Centre at Bristol University.  Money Advice Trust is a charity formed in 1991 to increase the quality and availability of free, independent money advice to people with debt problems.

The findings in the Trust’s report reveals many debt management companies failed to sufficiently highlight the costs and charges involved in arranging a debt management plan.  The key findings were:

• Some consumers were not fully informed of all the charges and costs involved in the arrangement until late in the process
• Some consumers even felt they were worse off than before they contacted the debt management company
• Some debt management companies did not make clear, from the outset, that in addition to an initial set-up charge, ongoing fees eat into the monthly repayments of those borrowers unable to meet former terms

Money Advice Trust said that it was important that debt management companies treat their customers fairly by providing information about charges and costs upfront in a clear and fair manner.  It also said that consumers struggling financially should also be made aware of the availability of free debt advice and debt management planning.  One such free service is National Debtline which the Trust funds.  National Debtline receives more than 40,000 calls every month.  Visit www.nationaldebtline.co.uk for more information.

The fee-charging debt management sector, which differs from simple debt consolidation firms, has grown threefold over the past decade.  There are now more than 150 debt management firms in the UK.  The Office of Fair Trading regulates the sector and is due to start a fresh investigation into debt management companies as its guidelines have not been reviewed for six years.

© UKfinancemarket.co.uk

A survey conducted by the Bank of England has revealed that the number of consumers defaulting on their loans and mortgages has increased and is expected to do so during the remainder of 2009.

Unsurprisingly, the Bank of England noted that state of the UK economy, including rising unemployment, was key to the rising figures.

It also noted that lending to UK businesses had not risen as fast as had been anticipated between April and June 2009.  However, despite this, lenders said they expected the availability of credit to UK businesses to increase between July and September 2009.

The outlook for consumers for the remainder of 2009 looks bleak.

While lending to consumers and businesses is expected to increase slightly over the next three months, it is generally accepted that lending levels will not be at a level such that that UK economy experience a strong and sustained recovery.  It is likely to be a few years until the UK economy recovers since it is clear that the pre-credit crunch lending volumes which fuelled the significant growth in the UK economy between 2005 and 2007 is very much unlikely to return.  Rather, lending volumes are likely to be much more conservative over the coming years which will lead to a slower and sustainable recovery in the long-term.

The Chairman of the Financial Services Consumer Panel (FSCP), Adam Phillips, has said that only 40 percent of homeowners experiencing difficulties with their mortgage repayments seek advice or help with their problems, following research carried out by the FSCP. 

The FSCP was set up by the regulator of the financial services authority, the Financial Services Authority, to advise the FSA Board on the interests and concerns of UK consumers and to report on the FSA’s effectiveness in meeting its consumer protection and public awareness regulatory objectives.  There are presently 13 members of the FSCP representing a broad range of consumer interests.  The FSCP is completely independent of the FSA and can raise its own concerns,  instigate its own research and publish its own reports. 

During his speech to the Council of Mortgage Lenders (CML), Mr Phillips also revealed that approximately 85 percent of those homeowners experiencing financial difficulties considered their position to be serious.

In light of these findings, Mr Phillips urged mortgage lenders to be pro-active in helping homeowners by providing them with access to advice and information about what to do to before their financial problems spiral out of control which will in turn become a disaster for both the homeowner and lender.

Of those homeowners who did seek advice and help with their financial difficulties, 65 percent went direct to their mortgage lender, while 25% went to the Citizens’ Advice Bureau (CAB). 

Those homeowners who went direct to their mortgage lender experienced varying degrees of assistance.  Some felt that their mortgage lender was unhelpful and inflexible in trying to help them, while other homeowners considered that their mortgage lender did all they could to help.  There is clearly a lack of consistency between lenders when dealing with their customers who are struggling financially – it would seem that it is literally pot luck if a homeowner is fortunate enough to be with a lender that is willing to do all that can reasonably be expected of it to help them if they suffer financial difficulties.  Clearly, there needs to be consistency in the way in which lenders deal with customers who are struggling with the loan and mortgage repayments.

Part of the problem with struggling homeowners not seeking help as soon as they ought to appears to be due the negative perception they have of financial businesses and advisers, which leads them to conclude that seeking advice is either a waste of time or inappropriate.

Mr Phillips noted that mortgage lenders are bound by the principles of the regulator the Financial Services Authority and that one of these principles is to treat its customers fairly.  This means that mortgage lenders have a duty to help their customers in financial difficulties, including arrears, and also to inform them about independent sources of advice.

He concluded his speech to the CML by adding that there is still significant opportunity for the financial services industry to highlight to homeowners the importance of seeking help as soon as possible if they are struggling with their finances.

As more and more UK consumers struggle during the current economic downturn, an increasing number of them are using loan sharks to make financial ends meet. 

Loan sharks are unlicensed lenders who operate illegally.  Consumers invariably turn to loan sharks when nobody else will lend them money.  In many cases, money that is desperately needed for simple things like bills and food – in those circumstances, consumers may feel they have no other choice but to use a loan shark.   

However, consumers should avoid using loan sharks at all costs since it is likely they will only make their financial situation worse.  This is because the rates of interest loan sharks charge on the money they lend is very high and consumers will probably find it difficult to keep up the repayments.  This may lead to the consumer being forced to take out subsequent loans which will only serve to exacerbate the problem, causing the debt to spiral out of control.  It is not unheard of for loan sharks to use violence or intimidation to collect outstanding debts.  

A study carried out by a Government organisation, The New Local Government Network, has revealed that an estimated 35,000 more consumers could turn to loan sharks during the current economic downturn because the sources of easy credit that were available prior to the credit crunch have now dried up, as banks have tightened their purse strings.  

The New Local Government Network, which was set up to raise the credibility of local government, has urged local councils to increase funds available from Credit Unions to help consumers who are struggling financially.  Credit Unions offer affordable credit to consumers who cannot access traditional high street loans.  

The hope is that by increasing funds available from Credit Unions fewer consumers will need to use loan sharks. 

Worryingly, The New Local Government Network noted that at least 165,000 UK consumers already use loan sharks.  This is perhaps not surprising given the number of loan applications currently being refused by traditional lenders and even sub-prime lenders.  It would seem that this figure of 165,000 will only increase given that desperate consumers struggling with their finances have little option but to borrow from the loan sharks until the traditional lenders start to lend again.