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Prison Threat to Lenders

by Steve Johnson of FT Your Money
14 March 2000

BIG-NAME banks have been threatened with jail after deliberately misleading consumers about the true costs of loans.

The Office of Fair Trading (OFT) says lenders are breaking the rules on presenting annual percentage rates (APRs) when they advertise personal loans. And it says companies who fail to clean up their act could be prosecuted under the Consumer Credit Act - with a maximum sentence of two years imprisonment and a hefty fine.

The OFT says one major scam involves lenders who rule that borrowers must take out payment protection insurance (PPI) to qualify for a 'cheap' loan, but then fail to include the PPI payments in their APR figure.

One firm offered a standard loan without PPI at 12.6 per cent APR, and a discounted loan with compulsory PPI at 10.4 per cent. But when the PPI payments were added, the true APR for the 'cheap' loan was 19.7 per cent.

A second scam involves quoting an attractive loan rate, without making it clear that this is a minimum APR only available to a few people, for example those who borrow very large sums.

The OFT warns lenders they must make it clear if a low rate is only available on certain types of loan or to customers who meet particular conditions.

John Bridgeman, the director general of fair trading, says: "We are receiving an increasing number of complaints about credit advertisements that do not comply with the regulations. Some of the breaches may be through ignorance, but in other cases consumers are being deliberately misled.

"PPI is being aggressively promoted and I am concerned that borrowers are being tempted into taking out something that may not suit their circumstances and without knowing how much it will cost them in the long term.

"The purpose of APRs is to enable customers to compare products. Lenders cannot continue to subvert this aim without expecting action to be taken against them." 

Be alert
You have been warned - keep your eyes open when reading the glossy ads from companies just a little too keen to lend you cash.

And if you come across any offers that are not all they seem - contact your local trading standards officers.


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