Loan sharks

Borrowing money is something most of us do at some stage in our lives. Whether it is a mortgage to help us buy a house, a bank loan for a new car, or a credit deal for a new washing machine. But what do you do if you can't get this type of credit and you still feel you need to borrow money? That is the position of an estimated 7 million people in Britain who are on low incomes, have poor credit records or both and are at the mercy of unscrupulous lenders.

Credit providers want to lend you as much money or give you as much credit as they can. So, if you can't get a loan from a more respectable source such as a bank or building society, there must be a good reason for it. It's probably because your present income and debt would cause you real problems in repaying any new loan. This may be hard for you to accept, but it's better than getting involved with a dodgy lender.

How do dodgy lenders work?

While many moneylenders may be perfectly fair and honest, unfortunately some are not. These unlicensed lenders are known as ‘loan sharks' and you should avoid them at all costs. Loan sharks will lend you money even when everybody else has turned you down, but they will also charge you very high rates of interest. Mainstream banks and other lenders typically charge interest rates of between 5% and 17% a year whilst the loan sharks charge as much as 1000%. If you borrow £500 at such a huge rate, it will cost you an incredible £5000 in interest over a year. But desperate borrowers sign up because they fail to understand the figures or choose not to think about it.

If you struggle to repay the loan - and the chances of this are very high - the next thing you'll know is that you're taking out another loan to repay the first one. Then, perhaps you'll take out another loan to repay the second loan and you just keep getting deeper and deeper in debt.

If you start to miss payments or fall short you are likely to find that the nice, helpful loan shark may turn nasty. He may physically threaten you or your family. He may also demand any social security benefit book you may have. All of this is against the law, as is threatening you by letters or phone calls. If you find yourself in this position, you should complain to the police. The Trading Standards Service may also be able to help you.

Taking action

The Consumer Credit Act 1974 says it is unlawful for a person to carry on a money-lending business unless they are properly licensed by the Office of Fair Trading. However, it can be difficult to prove that a person lending money is actually running a business within the meaning of the Act. Either way, loan sharks do not normally apply for a licence and so operate illegally. This is why loan sharks resort to threats to recover their money - they are extremely unlikely to want to take you to a civil court and risk scrutiny of their business.

The debt business is booming. Total consumer debt broke the £1 trillion barrier in 2004, leading to fears that Britain is in the grasp of a debt crisis. In response, the government is now overhauling our outdated 30-year-old consumer credit laws to ensure better regulation of the industry and a £2 million pilot project in Glasgow and Birmingham has been launched to begin tackling criminal gangs who give out quick cash loans.

If you've had great difficulty getting a loan, don't be tempted by someone who comes to the door with what might seem like a good deal. With any loan, check the small print. Don't sign anything straightaway and always take advice if you're in any doubt. Anything that seems too good to be true, often is.

If your debts are growing, you may be tempted to roll them into one loan and reschedule your payments with a debt management company. Beware changing unsecured debts such as loans and credit card balances into secured debts where your home is at risk - this is often the only way these companies will accept your business. They also charge fees for a service which is available elsewhere for free.

Happy alternatives

It might appear there are no alternatives to loan sharks - but there are. There are some regulated mainstream lenders who will lend to people on low incomes or with bad credit histories. Some firms specialise in lending to people with a poor credit rating. Also check see if there are any Credit Unions established in your area. Credit Unions are owned and are controlled by their members who pool savings to offer loans to members at low rates of interest. Each Credit Union has a 'common bond' which determines who can join it. The common bond may be for people living or working in the same area, people working for the same employer or people who belong to the same association, such as a church or trade union. Credit Unions are also known as 'people's banks', and are growing in popularity amongst those who have been refused credit elsewhere.

If you are experiencing financial difficulties it is always worth seeking advice from a national charitible organisation such as the Consumer Credit Counselling Service or National Debtline.

Remember....

You should always look for a lender who is reputable and before you sign anything check the small print so you understand fully what the conditions are. If you are unclear about the loan and the amount of interest you will pay, ask the lender the appropriate questions.