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Credit made easier.

Byline: By Louella Houldcroft

Plans to scrap rules which enable lenders to penalise customers who pay back loans early were announced by the Government today.

It would allow consumers to move a loan to another provider to take advantage of a more competitive rate or pay it off early without having to face excessive charges.

About 70pc of all personal loans are settled early, but under current rules people have to pay a penalty to do so, calculated using the so-called Rule of 78 formula, which tends to favour the lender.

The Department of Trade and Industry plans to replace this formula with one which is fairer to consumers, saving them an average of pounds 50, although it said on higher-value loans the savings could be thousands of pounds.

For example, if a consumer had a pounds 10,000 loan which was being repaid over 15 years, but they decided to pay it off after only six years, the penalty would have been pounds 1,344 higher under the Rule of 78 than the new method.

The reform will also aim to make consumers more aware of the charges they face if they end a loan early before they even take it out.

However, lenders will also be able to charge consumers the equivalent of one month's interest to cover the administration costs of ending a loan early.

Consumer Affairs Minister Gerry Sutcliffe said: "A central part of the Consumer Credit Act review has been changing the rules to deliver a better deal for consumers who settle loans early.

"The current system is outdated and the formula used by many lenders to determine how much is owed always favours the lender as opposed to the consumer.

"The changes I am announcing today will be fair to both lenders and borrowers. They will make it easier for borrowers to switch to better loan deals and ensure they have clear information about early settlement rules from the start of their loan agreements."

The move is part of the Government's reform of the 30-year-old credit laws, final details of which will be published in a White Paper in the autumn.

Other reforms include clamping down on loan sharks, magnifying the small print in loan agreements, stopping irresponsible lending and making it easier to take out credit online.

Mr Sutcliffe said: "The credit sector is far larger and more sophisticated than the one our credit laws were designed for."
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Publication:The Journal (Newcastle, England)
Date:Jul 23, 2003
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