A new report suggests lenders should help those in bad credit to improve their credit rating.
That is the message from the Economic and Social Research Council (ESRC) which feels high street lenders should be doing more to keep people with poor credit ratings out of debt.
It believes that these institutions should be collaborating with high-interest lenders to help people like the Meadows family from Southport, whose £5,750 loan soared to a debt of £380,000.
Professor David Knights from the University of Exeter says the Meadows case "placed the whole issue of credit and lending into sharp focus".
"It was a particularly graphic example of how a relatively benign loan can get way beyond the ability of ordinary people to cope."
'Near-prime' lenders are the newest development. These companies usually advertise in daily newspapers and on daytime TV, appealing to a larger audience.
They charge high rates of interest, but collect through banks, imposing penalties through 'ratchet' charges which increase dramatically if a repayment is missed.
But Professor Knights worries that this ratchet system means "comparatively trivial unsecured loans escalate into debts that lead to the repossession of homes and probably into the bankruptcy courts".
The study therefore suggests that major lenders should work together with 'near-prime' providers "with the aim of assisting borrowers to graduate to mainstream credit", where interest rates are much lower.To read more about loans, click here.
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