Debt Consolidation Loan on Borrowed Time?

Debt consolidation loans could be killed off by the Office of Fair Trading (OFT), according to Jeanette Harwood, a co-opted board member of the Association of Finance Brokers. She claims that should the OFT decide to exercise its newly found regulatory powers under changes to the Consumer Credit Act, the debt consolidation loan could be living on borrowed time.

It’s not a certainty that these loans will be withdrawn, but a lot depends upon how subjectively the OFT look at it, as Harwood points out: “If the rules are interpreted in a strict way irresponsible lending could become a major issue,” said Harwood. “The guidance document states that irresponsible lending could include lending to those who have an inability to repay existing credit, or pay only the minimum amount each month. So, debt consolidation could be become a thing of the past if the OFT takes a hard line.”

But, despite Harwood’s warning it will take time to see exactly how the OFT exercises its new powers, which became effective in April as part of the amendments to the Consumer Credit Act. In addition, new rules have been introduced into the legislation concerning unfair relationships, and courts can now examine anything done or neglected by the intermediary or lender when deciding whether a contract is fair, in relation to the credit agreement.

The crux of the matter, according to Haywood is that previously there was no clear definition of ‘unfairness’ so any intermediary or lender who had sold a secured loan had to ensure that they could provide supporting evidence of advice given to their client. The additional legislation is also likely to prompt a number of complaint handling firms to enter the market on a no-win, no-fee basis, and so lenders and intermediaries should do everything possible to ensure that they are covered against potential mis-selling claims.

The way that secured loans are sold will be under greater scrutiny than ever, and if the OFT decides to exercise the legislation in the way that Harwood believes they will, then the debt consolidation loan could have had its day, leaving many people wondering how they are going to solve their debt problems. The danger is that many homeowners, who in the past could rely on taking out a debt consolidation loan as an efficient debt solution, may well find that they are no longer available and that minor worries soon become major financial difficulties.

Adam Singleton is an online, freelance journalist and keen gardener. He lives in Scotland with his two dogs.