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Loan shark crackdown; BUT THERE CAN STILL BE A RISK.

Byline: KEVAN REILLY

RIP-OFF loan rules are to be scrapped as part of a Government clampdown.

But the notorious Rule of 78, which hits millions of borrowers, won't go until next summer. And ditching it won't do much to help those already facing trouble.

One couple who took a pounds 2,450 loan over 10 years with North Mount Securities in April 1987 have found that out. The Mirror Money readers, who don't want to be named, signed up to pay pounds 71.46 a month over 10 years, at a rate of 39.48 per cent.

When they missed payments, they were hit with interest penalties. Now the firm wants pounds 70,000 to settle the loan and has the law on its side.

The Rule of 78 - the name comes from adding up the 12 months in the year, starting by adding January (one) to February (two) and so on - was introduced in 1974.

It allows lenders to calculate interest monthly and levy penalties if you repay early. About two thirds of personal loan firms, including many High Street banks and building societies, still use it.

Early repayment penalties are generally one or two extra payments. However calculating interest monthly rather than daily also stings borrowers.

If a firm uses monthly interest calculations, borrowers may have to pay for the whole month if they repay a loan early, which 70 per cent of borrowers do. On a pounds 5,000 loan at 12.9 per cent, that can cost pounds 90.

Those who don't use the rule include Barclays, Nationwide, Intelligent Finance and Cahoot. They all believe there's no justification for penalty payments which punish customers for being good.

They point out that it's now easy to calculate interest daily, though many firms stick to monthly because that favours them.

Housing regulations inspector Mark McCabe found that out when he switched his loan from Royal Bank Of Scotland to Intelligent Finance.

The 31-year-old from Livingston, West Lothian, lives with wife Moira, 29, and daughters Anna, five, and 18-month-old Lucy. He had a pounds 5,000 loan over five years and decided to switch after three years. He assumed he'd have paid about pounds 3,000 back.

"When I got a redemption figure I still had half the balance to pay once penalties were added on," he says. By switching, Mark will avoid penalties and enjoy a lower rate.

Research for Barclays shows two thirds of customers don't know there are such charges or the difference made by the way interest is calculated.

Consumer Minister Melanie Johnson, who announced the plans to ditch the rule, says: "Many consumers are shocked when they find out how much it will cost them to settle credit agreements early. The formula favours the lender rather than the consumer."

However she has still to outline rules to tackle firms charging extortionate interest rates.

Meanwhile, many firms already offer loans without penalties and where rates are calculated daily.

The cheapest rate is currently seven per cent at Cahoot. But not all borrowers will be accepted by the cheapest firms, which run credit checks.

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SHOCK: Mark McCabe and his daughters Picture: MARTIN GILFEATHER
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Title Annotation:Features
Publication:The Mirror (London, England)
Date:Sep 4, 2002
Words:529
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