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The New Loan Rules

In late May 2005, the Department of Trade and Industry announced changes to loan rules as part of the Consumer Credit Bill designed to help consumers better understand their loan agreements. Lenders are now required to provide consumers with information that will help them shop around for the best deal.

How? Lenders are now required to provide information to consumers including the total amount repayable on a loan. This change makes it much easier for consumers to determine, for example, the amount of interest paid on a low-interest loan over a long period of time verses a higher interest on a shorter loan.

These are welcome changes for groups who represent consumers, such as the National Consumer Council. The new rules will help consumers make decisions that are more informed. For those who may already be experiencing difficulty paying current debts, lenders will not be as able to "sell" them on a loan that may not be quite as great as the seller makes it out to be.

Hidden or less-obvious costs can add up, and these costs will now be totaled up front. The new rules may help alleviate the problems that many people face when it comes to debt--living pay cheque to pay cheque, not being able to make payments, or declaring bankruptcy. If consumers are aware of the total costs, they may be able to make wiser decisions. People will know exactly what they are agreeing to when they sign the papers.

What exactly will lenders provide?

Lenders will need to provide a list of pre-contractual information that clearly indicates all primary issues of the loan, including: The total amount borrowed The total amount to be repaid Payment amounts and frequency

  • APR (annual percentage rate)
  • Penalties and cost thereof
  • Early settlement charges, if any

Upon signing, the loan itself must also clearly indicate all of the information listed above. Additionally, separate information regarding extras must also be clearly indicated, such as payment protection insurance and costs. These extras are to be listed with an additional signature box to help ensure that consumers clearly understand what they are agreeing to when they sign.

The new rules also include requirements on what lenders can charge for early settlement fines. Lenders will be allowed to recoup administration costs, but the total penalties allowed are lower due to new methods of calculating costs.

Some groups have expressed concerns that the new rules will encourage lenders to charge higher fees to cover the required documentation. Concern was also expressed that the stringent rules will force out smaller lenders who are unable to compete, which would in turn leave the doors open for dishonest lenders.
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