Home Credit Agents Encouraged to 'Flip' Loans
1st July 2005

Research published by the Competition Commission reveals that Home Credit agents are given incentives and put under pressure to increase the indebtedness of borrowers by 'flipping' (rolling over) loans.

The report, by Andrew Irving Associates, comments that agents are prompted by their managers from the outset to encourage borrowers to take out further loans and that this is often rewarded through the commission schemes that determine how agents are paid.

The findings confirm the concerns expressed by Debt on our Doorstep in its original submission to the Competition Commission that the rolling over of loans is a major money spinner for the home credit industry and that companies go out of their way to encourage people to get into increased levels of indebtedness. In particular, we noted that the rolling over of loans leads to extortionate levels of costs as elements of the home credit loan end up being paid for twice over. For example, a borrower takes out a loan for 55 weeks. In the cost of that loan is an amount built in to cover the home collection of the loan for that period. If the customer then refinances the loan in week 30, and it takes a further 55 weeks for the new loan to be cleared then they will have taken 85 weeks to pay off the loans but home collection charges for the full 110 weeks will have been included. Interest will also have been compounded on 25 weeks interest at the time the loan was rescheduled.

This practice is known as loan flipping in the U.S and has prompted some states (e.g. North Carolina) to introduce specific legislation to prevent it. We will be urging the Competition Commission to take action in the U.K to address this as the inquiry progresses.