Consumers cautioned about high interest loans

A debt adviser has warned against the dangers of heavy credit arrangements, after it emerged that a couple who took out a £5,750 home improvement loan in an attempt to pay off arrears on their mortgage are being pursued for £384,000 after the debt spiralled out of control.

Tony and Michelle Meadows, from Southport, Merseyside, who are fighting a repossession order against their £200,000 home, took out the 15-year loan in 1989, the Daily Telegraph newspaper reports.

Annual interest of 34.9 per cent plus late payment penalties and £40,000 in legal fees caused the loan to spiral when the couple failed to make repayments for three years.

They have now been taken to court and the case hinges on whether the credit agreement the couple signed was "extortionate".

A spokesman for Citizens' Advice, which provides free advice to those in debt, said that sums borrowed under extortionate credit agreements can spiral because there is the sum borrowed, plus arrangement fee, the interest and penalty fees for late or missed payments.

"If a debt collection agency is involved, there are more charges for collecting payments and these charges are not regulated," he said.

The loan was originally made to the couple by Home Loans Northern but was later sold on to another firm, London North Securities.

The couple, who have made repayments of £25,000, attracted a high rate of interest as they were considered to be "high risk" borrowers.

Neil Levy, representing the loan company, told Liverpool county court: "The significance is the failure to make payments over a long period.

"If you have a mortgage and you do not make payments for three years and over, you would expect there to be some considerable balance."