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Cost of debt - CFA wants `level playing field`

18/12/2009

The Consumer Finance Association (CFA) has called for action making it easier to compare the cost of different kinds of debt.

The CFA, which represents providers of short-term personal loans, issued a press release on 27th November - two days after the Supreme Court ruling on unauthorised bank overdraft charges.

"Many borrowers use bank overdrafts or short-term finance products such as payday loans to smooth out peaks and troughs in their finances," said CFA chief executive John Lamidey.

"However, bank overdrafts are exempt from regulations that require lenders to show an APR for their loans. APRs [Annual Percentage Rates] are an inadequate measure for short-term borrowing and can be misleading, so what is needed is a simple method to show the total costs of borrowing so that customers can compare different forms of short-term finance, including overdrafts, on a like-for-like basis."

The press release goes on to illustrate the potential cost of two common forms of debt - a sample unauthorised bank overdraft and a sample online payday loan.

It points out the potential cost of carrying a £200 debt for 30 days:

• If the overdraft charged a flat fee of £5 a day, the cost of carrying the debt would work out at £150 - in other words, 75% of the debt itself.
• Through the payday loan cited, the cost would be £50 - in other words, 25% of the debt itself.

CFA members support the work of the OFT in seeking ways to ensure that all charges for consumer credit products are easy to understand, transparent, and enable informed consumer choice," Mr Lamidey concluded.

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Government warns about rising credit card debt 05/03/2010 - The latest figures from the Bank of England (BoE) have Debt - the 12-month view 04/03/2010 - In January, UK citizens - between them - borrowed £500 Amount of `bad debt` written off reaches 16-year high 03/03/2010 - The latest figures from the Bank of England (BoE) suggest Deeper into debt: middle-class poverty 02/03/2010 - The recession has also affected a lot of people with