Borrowers to be armed for battle over loan charges

Getting caught out by exorbitant charges in the small print of loan agreements could soon be a nightmare consigned to history as the Government plans radical changes in the credit laws.

The reforms will allow people to challenge unfair agreements without the expense of going to court. With so many consumers stung by unfair terms and conditions and swingeing rates of interest, greater transparency in loan agreements is long overdue.

Melanie Johnson, consumer affairs minister, announced last week that a new body will be set up to consider disputes about the terms of agreements. Lenders will also be scrutinised to establish whether they have behaved responsibly. This could signal the end for loan sharks who target the vulnerable, offering to help them out of a debt crisis.

Consumer bodies will also be able to pursue group claims on behalf of borrowers for the first time under the UK's 30-year-old credit laws. And consumers will find it easier to challenge loan agreements, on the basis that they are "unfair" instead of "grossly exorbitant".

"I want to give consumers real power to challenge unfair credit agreements," explains Ms Johnson. "This overhaul of credit laws will allow consumers to challenge unfair practices at any time throughout the term of an agreement and to do that without going to court."

Delroy Corinaldi, public affairs officer at the Consum- ers' Association, says: "These proposals will offer much-needed protection for future consumers. But it is vital the Government takes steps to ensure that people who most need fair and accessible credit are not driven underground into the hands of loan sharks."

The best protection is to look out for yourself and remember that if something looks too good to be true, it probably is. There are so many personal loans on the market that punitive rates and clauses can be avoided – as long as you are careful. Stick to recognisable brands. This doesn't give you complete protection but makes it less likely you will end up with a loan shark.

Shopping around for the best deal is important. Insurance brokers such as moneysupermarket.com allow you to search for the best deal on the market. Lombard Direct Internet Only, for example, is charging 6.7 per cent interest on loans between £5,000 and £14,999. If you want to borrow up to £25,000, Direct Line charges 6.9 per cent interest.

Many consumers incur big charges because they miss loan repayments. But while repay- ment protection is offered by lenders, it hikes up the cost. HSBC, for example, charges 12.9 per cent on personal loans. If you borrow £7,500 over 60 months, your repayments are £167.71 a month, but with insurance this rises to £205.57.

Check what penalties you incur for missing payments and ensure you are comfortable with them. You should also calculate how much you will end up paying back over the term of the loan, with or without insurance, and then see if you can really afford it.