It is one year since the Consumer Credit Directive (CCD) was implemented in the UK; its aim is to make it easier for consumer to compare products and make sound decisions about the credit on offer. The European Council wanted to create one standardised set of rules for credit providers within the EU.
The current climate has made it more important than ever to take out credit that suits an individual’s personal circumstances. The implementation of the CDD was designed to protect the consumer, and improve confidence in choosing the right unsecured credit product.
Unsecured credit is any sort of lending product where the borrower is not requirement to put an asset down as a deposit in the event of defaulting on payments. These could include personal loans, credit cards, and overdrafts. Secured credit is not covered by the CCD.
The CCD brought several changes to the way that unsecured credit products were advertised, including ‘typical’ APR. The Directive also requires that all representative APR figures are accompanied by a representative example to show any charges etc.
This interest rate was what the majority of customers were offered, in fact more than 66% of applicants had to have been offered this typical APR. The CCD changed this to ‘representative’ APR, where just 51% of customers had to be offered that rate.
This is a significant change as fewer people applying for credit products will receive the representative APR that is advertised. Whilst 51% may technically still be classed as the majority of customers, it is a far cry from the 66% required previously.
The change from typical APR to representative APR has also led to lenders advertising very attractive credit card deals, offering as much as 22 months interest free. Whilst this is great news for those the rich and those with excellent credit ratings, it does not help those in more difficult situations. Almost half of applicants will not qualify for the low rates of APR being offered, and could be given much worse rates.
Certain consumer groups have actually accused lenders of promoting these 0% interest offers even more, now that they are aware that they have to give it to less people. The number of people taking up these great credit offers has nosedived since the introduction of the CCD.
Allowing credit card companies to decline more applicants is just one example of how the CCD has perhaps helped the rich obtain much better credit products, and leave the poor with worse rates. This statement is confirmed by the fact that despite the huge number of interest free and low-interest deals on the market, average credit card APR is actually at the highest it has been for more than a decade.
This increase in the number of declined applications caused by the CCD changes could be partially responsible for significant increase in payday loans. These loans are short term cash advances, designed to tide consumers over until the next payday, and as such are only for short term borrowing.
Research has found that around half of payday loan borrowers are actually professionals and white-collar workers, with 7% of them being accountants and financial advisers. This is a far cry from the stereotypical image painted of students, those on benefits and unemployed, or with poorly paid manual jobs.
The typical or representative APR on payday loans usually reaches into the thousands, which compared to the offers being advertised by credit card companies, is outrageous. However, the payday lenders defend their APR as their credit is not designed to be for the long term, and therefore an annualised interest rate does not provide an accurate representation of the amount borrowers will need to repay.
The fact that professional workers in administration, management, and sales, amongst doctors and financial advisers, are taking out payday loans suggests that the implementation of the Consumer Credit Directive has actually caused hard-working people to be refused affordable means of borrowing. The total number of borrowers has risen significantly in the past 12 months and led to a boom in the payday loan industry.
The CCD was always intended to make the unsecured credit market much more transparent and easier to compare products. Whilst it may have achieved this to a certain extent, it has also led to more people turning to payday loans due to refused products, but on the other hand increased marketing of great rates for the rich.
|Written by :|
|Jemma is a news & research reporter for compareandsave.com.
Having worked as a journalist on a number of personal finance websites; she now spends time researching and commenting on UK personal finance stories and investigating new ways to help our readers save money.
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