The U.K.'s inflation rate rose to 3.7% in December, well above the BOE's 2% target. Households will end up paying hundreds of pounds more to cover the cost of credit card bills and loans, experts have predicted. Interest rates on unsecured debt will rise by 2%-3% in the coming three years.
This would add £1,800 a year by 2015 to the typical household's credit card and loan bills
The Consumer Credit Directive (CCD) comes into force on February 1, 2011 and is designed to improve transparency and protection for consumers when applying for unsecured credit across EU. However the extra requirements on lenders are expected to push their costs up, leading to higher interest charges.
Under the Consumer Credit Directive, which brings advertising of unsecured loans in the UK in line with EU rules, providers will have to display an interest rate that at least 51 per cent of customers will be offered. Currently, lenders can only advertise a rate if they expect at least 66 per cent of borrowers to qualify. The consequence is that from next month fewer borrowers will be offered the advertised rate.
Lenders are required to carry out more detailed credit checks on borrowers before entering into credit agreements or when increasing the level of credit. Additionally, they must give prospective borrowers an explanation of the features of the proposed agreement, including the repayment amounts and the consequences of default.
Under the rules lenders have to make borrowing examples clearer and provide more details about credit agreements. A lender who rejects an application because of the customer’s credit profile must inform them of this and identify which credit reference agency was used to make the decision.
If you are given a loan, you will now have a 14-day trial period during which you can cancel the loan agreement.
You can increase your repayments without being penalised and thus reduce the overall cost.
Consumers will also receive greater buying protection. For example, anyone using a credit card or personal loan for transactions over £100 will receive increased protection up to £60,240, up from the current £30,000.
The new lending rules make it even harder for borrowers to secure credit unless they have an good credit history. Lenders will be more cautious of who they are lending to and borrowers should expect greater scrutiny of customer borrowing and spending habits. consumers might turn to different types of loans if they find themselves blocked from mainstream lenders like banks. Customers needed to be aware of the terms and conditions of such loans.
Point of sale finance products, payday loans, home credit providers and pawnbrokers will provide for these kinds of consumers, but the cost of credit needs simpler explanation for consumers.
The average household faces unsecured debt repayments of up to £1,800 a year within the next four years, it is predicted,.