The government is to unveil an initiative to help people, especially those on low wages, beat the credit crunch, the BBC has learned.

The Treasury will announce later that it is to relax the rules governing credit unions - community-based savings and loans organisations.

It is designed to help people who are having trouble either repaying debts or obtaining loans from other lenders.

Ministers fear such people could become easy prey for loan sharks.

Credit unions work as low-risk savings and loans providers, frequently for less well-off customers.

Common bond

The move comes amid concerns such customers may be particularly badly hit by the credit crunch, such as by finding it increasingly difficult to borrow money from traditional High Street lenders.

Although any area or organisation can form a credit union, they have to operate within their own communities - known as the Common Bond.

The Treasury plans measures to broaden the Common Bond, allowing the sector to expand.

By this time next year, ministers hope to get rid of many restrictions on who credit unions can lend to, allowing them to branch out by forming alliances with other unions, employers and housing associations.

They hope that by doing this, people will be able to access cheap, secure loans which they will be able to repay.

source: BBC news

Often, when people borrow money, they do not know they are borrowing money: they are buying something on credit; they are delaying payment or staggering payment for something over a period. No matter how they view it they are, in effect, borrowing money to pay for the item now and repaying the loan over the agreed time. There will be a finance company involved and the customer will have to sign an agreement with them and will owe the money to the finance company and not to the shop.

Many shops want to sell items on credit because they have strong links to, if not ownership of, the finance company. They can sometimes afford to sell the items very cheaply and then make their money on the finance deal. With many stores still charging in excess of 25% APR this can mean a very healthy profit for them on items which they sell for barely more than cost price.

What is APR and What Does it Mean to You?

Annual Percentage Rate or APR is the standard measure for the cost of loans.

It is the gross amount of compound interest charged if no repayments are made. For example, imagine you borrow �100 from company A and do not pay anything back to them over the course of a year. At the end of the year you still owe them the original �100 plus another amount, let’s say �10, in interest. That �10 indicates that there is an APR of 10% ¹.

An APR can be seen as the price of a loan, so that you can compare one with another. At the time of writing this it is possible to obtain a loan from an Internet lender in UK at 5.9%. This means that if you were to borrow �100 you would owe them �105.90 at the end of the year if you didn’t repay anything before then².

If you are astute you will have noticed that the APR is equivalent to the pound³ price of borrowing �100. This makes comparison easier, which is what it was designed for.

So, when you see that the shop will charge you 29.5% on their ‘easy credit’ terms they want to charge you �29.50 for each �100 you borrow if you don’t pay the instalments. If you borrowed at the bank at 5.9% you would be saving yourself about four-fifths of the credit charge.

And There’s More

If you are sufficiently clever as to notice that you could save yourself some money by getting the credit elsewhere you may even be brazen enough to negotiate a discount for cash. This Researcher has negotiated such deals in several High Street outlets. A 5% discount covers the finance charges of the 5.9% loan, if repayments are made on time, over 12 months⁴.

Some lenders don’t like to tell people what their rate of interest is. Be nervous if this is the case. Some bona fide companies regularly charge rates in excess of 150% APR and one major lending company was revealed on TV to charge in the region of 1000%. Rather than being some shady back-street loan shark, this was a fully registered and legal company operating in your neighbourhood⁵.

Avoiding High Interest Payments

Look around. Generally don’t be tempted to take credit from the seller. This is often an expensive option. Ask to see the APR in writing before taking on the loan. Ask if there are any other charges (including expensive insurance) or penalties which you may incur.

Another Approach

Treat the loan or credit agreement as something you are buying. Would you want to pay �25 for something you could get for �5? Comparing APRs helps you to avoid that. Also look at the total repayment figure on any advertisements for items you are thinking of buying - especially cheap computers through the newspapers.

A computer with a cash price of �700 may seem cheap for a well-specified machine. If you aren’t in fact paying cash for it the actual price you will pay is the credit price which is often given in the small print. This could be well over �1000. Ask yourself if you would buy it for �1000 in the first place or whether the deal seems less attractive now. It may be a better deal to buy a computer with a higher initial price tag but on interest-free credit or using a low interest loan. Or even better, get the cheaper machine but pay for it with a low-cost loan and avoid their own expensive credit.

An Example

Joe and Mary both want to get a new computer and they look through the newspaper. Mary looks for advertisements for cheap credit while Joe drools over the specifications of the computers. Mary finds she can get credit at 6% APR. Joe finds just the computer he wants and it’s only �700 with easy credit terms and an interest-free period.

They show each other the advertisements they are interested in.

Joe: That’s boring financial stuff! Why are you looking at that? Look at the memory on this - and it’s got a DVD rewriter!

Mary: How are you going to pay for it?

Joe: I don’t have to worry about that now. I can get six months’ interest-free credit and then think about paying.

Mary: Well I like the look of the machine so I’ll get one too - but I’ll pay for it with this low-cost credit.

Joe and Mary get the same computer and they are very satisfied with them. Mary pays off her low-cost loan over one year on a monthly basis. The total cost of the computer (including credit) is under �740. When the six months is up Joe still hasn’t sorted his finances out and takes the computer company’s credit terms. By the time he has finished paying for it, it has cost him over �1000.

Beware of the Penalties

When you make an agreement to repay a loan there is often small print about what the penalties will be if you miss a repayment. A credit card company, for instance, may say a late payment incurs a �15 charge - this is not included in the APR rate as the APR will not include penalties. If you continue to miss payments you will continue to incur penalties and begin to receive letters⁶. These are charged at another amount - all of these amounts⁷ are added to your outstanding balance. If you think that you cannot make a payment let the lender know - you may be able to negotiate with them. If you are finding debt unmanageable go to a free independent advice service, such as your local Citizen’s Advice Bureau or a debt counselling service.

You will be surprised at the help you can receive and sometimes they may even speak to the lender on your behalf. All sorts of things can be negotiated including dropping the interest charges altogether in some circumstances.

source: BBC News

The UK faces its “most difficult economic challenge for two decades”, the Bank of England governor has said.

Mervyn King was speaking at the Mansion House dinner and made it clear that inflation was set to rise, while growth and house prices were likely to fall.

Mr King also warned that real take-home pay would stagnate, making life difficult for some families.

His words came as Chancellor Alistair Darling said the Bank would have new powers over UK financial stability.

This would be in addition to its objective of setting interest rates, he told the annual dinner of business leaders.

It has also emerged that Sir John Gieve is to stand down early as Deputy Governor of the Bank of England.

‘Not an easy time’

Mr King said that the Bank had the “right framework” to make sure inflation returned to the government’s 2% target and that economic growth recovered.

He said the Bank’s rate-setting Monetary Policy Committee (MPC) was “prepared to take whatever action is needed” to bring inflation down.

READ THE FULL SPEECHES Alistair Darling’s inaugural Mansion House speech [1.5MB] Mervyn King’s Mansion House speech [155.26KB] Most computers will open this document automatically, but you may need Adobe Reader Download the reader here

The BBC’s economics editor Hugh Pym said that this meant “in other words, interest rate rises couldn’t be ruled out”.

But Mr King added that no monetary policy could prevent the current effects of rising food and energy prices on living standards.

Neither could interest rate cuts coax banks, which are currently re-evaluating risk and keeping a tight grasp on their balance sheet, to be more generous in their lending to house buyers.

And he warned that higher living costs were likely to restrain consumer spending to a far greater extent than tighter lending conditions as a result of the credit crisis.

“It will not be an easy time, and I know that some families will find it particularly difficult,” he warned.

These predictions were echoed by Adrian Coles, of the Building Societies’ Association.

He said it would be “the first time in about 10 or 12 years that we’ve had no increase in real pay”, prompting him to conclude that “people are really going to notice a difference in the economic environment”.

Mr King also warned that “the era of cheap mortgage finance that underpinned the housing market in 2006, and the first half of 2007, is over”.

‘Act decisively’

In his first speech to the annual dinner, the chancellor emphasised the need to tackle inflation, although he pointed out that the current rate of 3.3% “remains low” compared to the 1970s “when it reached over 26%”.

Mr Darling said the new powers given to the Bank would see a new Financial Stability Committee set up to guide the Bank’s operations in this field.

“It will bring valuable, external expertise with City experience to bear on the Bank’s decision-making,” he said.

“The challenge for us is to ensure that the authorities can act quickly and decisively where necessary to support financial institutions,” Mr Darling added.

He intimated that the proposals would clarify and enhance the powers of the Bank of England and the UK financial watchdog, the Financial Services Authority, in addition to improving co-ordination between the regulators.

More details will come in a letter to the Treasury Select Committee chairman John McFall on Thursday.

Mr Darling’s stance was upbeat, arguing that the UK would continue to grow despite “global difficulties”.

He said: “Independent forecasters expect UK inflation to fall back next year.

“Employment is at a record high. Many order books are full. British business is competing and winning all over the world. Our economy is flexible and resilient.”

Pay deals

As part of his strategy to tackle consumer inflation, Mr Darling again called for pay restraint in both the private and public sector.

Shadow chancellor George Osborne told the BBC that if he were running the Treasury he would not rule out renegotiating public sector pay deals.

“We need to be helping people with the rising cost of living, not hitting them,” he said.

Meanwhile, shadow chief secretary to the Treasury Philip Hammond called the chancellor’s speech a “missed opportunity”.

“What Britain needed from the Mansion House speech was a display of economic leadership. Instead all we got were rehashed announcements and no new ideas,” he said.

source: BBC News

http://news.bbc.co.uk

Rising food and energy prices have pushed UK consumer inflation to its fastest rate since the measure began in 1997, government figures have shown.

The Consumer Prices Index (CPI) measure of annual inflation was 3.3% in May, up from 3% the previous month, said the Office for National Statistics (ONS).

The rise means that the Bank of England governor must explain to the chancellor its policy for controlling price rises.

The wider Retail Prices Index rose to 4.3% from 4.2% in April.

The biggest contributor to consumer inflation was the rising price of food and non-alcoholic drinks, the ONS said.

This was mainly due to the increasing cost of meat products, particularly bacon, and vegetables.

Increasing household energy bills were also a significant factor, along with the rising cost of books, stationery and foreign holidays. However, this rise in the cost of leisure and recreation was offset by a fall in the price of DVDs, according to the ONS.

Further rises?

Some analysts have predicted that CPI could reach 4% this year.

If inflation rises more than one percentage point above the government’s 2% target, the Bank of England governor must write a letter to the government to explain what action it is taking to control consumer prices.

This would almost certainly be the first of several letters Howard Archer Economist Are you feeling the credit crunch? Viewpoint: Sir Alan Budd

The Bank governor Mervyn King has had to write such a letter to the chancellor only once before, when inflation hit 3.1% in April 2007.

Mr King is likely to blame significant rises in international commodity prices.

“This would almost certainly be the first of several letters, as consumer price inflation looks well set to reach 4% this summer before starting to fall back late in the year,” said Howard Archer, UK economist at Global Insight.

Economic slowdown

The higher than expected rise in consumer price inflation has transformed expectations for interest rates, according to the BBC’s Economics Editor, Hugh Pym.

Confident talk of two or more cuts in borrowing costs from the present level of 5% has been replaced by forecasts of unchanged or even higher rates in the months ahead, our editor says.

Mr King and his colleagues are unlikely to cut interest rates further until they are convinced that the inflationary threat has passed - despite pleas from those struggling in the housing market.

However, analysts warn that raising interest rates to curb inflation could dampen an economy already dented by slowing growth and the weakening housing market.

“The key factor [deciding the direction of interest rates] will be whether increased inflationary expectations feed through into greater wage demands and second round effects – at the moment average earnings growth is stable, but the MPC will be watching it closely through 2008,” said economist Charles Davis from the Centre for Economics and Business Research.

Passed on

Consumers and companies are already feeling the effects of higher energy and food bills.

Oil prices have nearly doubled over the past year and on Monday the price hit a fresh high of almost $140 in New York.

That in turn has pushed up the cost of petrol and diesel, prompting many people to rein in their spending in other areas.

At the same time, many food prices have surged to record levels because of increased demand and inclement weather in key producer nations.

Interest rates are expected to remain at 5% when the Bank of England announces at midday the results of its latest monthly meeting.

Economists predict the Monetary Policy Committee (MPC) will decide to keep rates on hold amid concerns about the pace of inflation.

But a slowing economy and falling house prices have caused some to call for a cut in rates to boost spending.

Last month, the MPC voted eight to one in favour of keeping rates at 5%.

Rising food and fuel prices have pushed inflation to 3%, well above the Bank of England’s 2% target.

That accelerating rate of inflation means that the Bank of England is unlikely to cut rates to try to bolster the flagging economy, as this could make inflation worse.

Housing slowing

This week, the economic organisation the OECD, predicted that UK growth would slow to 1.8% this year and to 1.4% in 2009.

It said the global credit crisis, the high costs of commodities such as oil and slowing property markets were all hurting the UK economy.

Problems in the housing market have driven the Home Builders Federation to call for a 0.5% reduction in interest rates.

A cut is now “imperative”, it said, to alleviate “a severe housing market slowdown, driven primarily by a halving in mortgage availability”.

However, economists say this is highly unlikely.

“It’s difficult to envisage anything other than no change,” said KPMG chief economist Andrew Smith.

http://news.bbc.co.uk/

Guardian.co.uk

The scale of mis-selling of loan payment protection insurance is greater than previously thought, with as many as two million policies sold to people who may never be able to make a claim, according to a leading consumer body.

Which? formerly the Consumers’ Association, said a third of people taking out the insurance on a loan in the past five years may fall foul of exclusions that would prevent them claiming.

Its findings come days before what is expected to be a highly critical report from the Competition Commission, which has been investigating the £5bn-a-year industry and is likely to announce a crackdown on the way the policies are sold.

The insurance is typically taken out to cover debt repayments if people are unable to work owing to illness, injury or redundancy. It is often sold by banks when people take out a new loan or credit card, and is also offered by retailers, car dealerships and other businesses. However, an Office of Fair Trading investigation criticised many of the companies that sell the insurance, warning them that their policies were a rip-off and often mis-sold.

The Competition Commission announced a full-blown investigation in February last year and the City regulator the FSA, has also looked at the sector, fining seven companies for poor selling practices.

Which? surveyed people who had taken out a loan during the past five years and found that 32% of those who signed up for the insurance may fall foul of one or more of the “significant exclusions” in the small print. That could amount to between 1.7m and 2.1m policies.

“People who are self-employed or on a fixed-term job contract, for example, often aren’t covered by PPI. Nor are many people aged 65 and over, or people who might claim for absences relating to pre-existing medical conditions,” said a Which? spokesman.

The research also found that the average loan is £6,050. One in 10 have borrowed £10,000 or more.

Doug Taylor, Which? personal finance campaigner, said: “We’ve always known that people were being mis-sold [payment protection insurance], but we were still amazed to discover the scale of it. It appears that salespeople are chasing their commissions, while their bosses are chasing profits. Where’s the sense of responsibility to the customer?”.

He said if someone with a loan thought they might have been mis-sold the insurance: “now’s the time to fight back”.

Many people may not be aware that policies only pay out for a limited amount of time, often 12 months, and that credit and store card insurance frequently covers only the minimum monthly payment.

The FSA has already designated the insurance a priority because of the potential risks to consumers, and has fined or censured a string of companies over poor selling practices.

This month sofa retailer Land of Leather was fined £210,000 for not having effective monitoring or training in place to ensure the insurance was being sold fairly. Last autumn the regulator said it had found improvements in some areas, but many firms selling policies were still failing to treat customers fairly. In January it brought in rules designed to improve sales practices.

The Competition Commission is publishing its provisional findings on June 5. Its report is expected to propose sweeping changes in the way PPI policies are sold. It could even call for them to be sold separately.