Scots spiralling into money difficulties are being “exploited” by debt management companies charging fees for repayment plans that can be arranged for free.
That’s the warning issued once more today by charities and debt experts in Scotland as new figures show the extent of the money problems experienced by households across the country.
There are also concerns that many people are taking out the wrong form of debt repayment plan, leaving them trapped in unsuitable and potentially costly arrangements.
The latest insight into the scale of the Scottish debt crisis comes in a new “debtmap” providing a breakdown of debt levels by postcode area. The online tool, created by PayPlan, the free debt management company, reveals that the highest average debt in Scotland is in Dumfriesshire, at £93,875 (including both secured debts such as mortgages and unsecured debts).
The greatest total debt is in Glasgow, where residents in the red owe some £35 million on mortgages and other loans, followed by Edinburgh (£23.3m), Kilmarnock (£13.1m) and Motherwell (£10.5m)
The debt map created by PayPlan – at www.payplan.com/ukdebtmap/ – also gives the number of people in each postcode that have gone to the company for help, plus the average debt per person and the total value of new debts.
Around one in four PayPlan clients in Scotland has taken out a debt management plan (DMP), which helps them repay their creditors by making one affordable payment each month.
Jason Eaves, director of Payplan, said: “Right now we are being told that the economy is ‘out of intensive care’ but there are still a few years ahead where people will continue to struggle financially.
“Many people are struggling to make ends meet, so if mortgage rates rise and gas and electricity prices increase it will push many more people into problem debt.”
The latest bleak figures emerge alongside a new report revealing an increase of a third since 2008 in the number of homeowners in Scotland seeking help for financial difficulties. Homeowners now account for 28 per cent of people going to Debt Advisory Centre (DAC) Scotland for help, up from 21 per cent five years ago.
The DAC is among the many organisations charging for help with money problems. It levies an initial fee of up to £475 for arranging a debt repayment plan and a monthly fee of 15 per cent of each monthly payment, up to a maximum of £85.
However, debt management plans and other solutions can be arranged for free through charities including Citizens Advice Scotland (CAS) and StepChange Debt Charity Scotland, plus a small number of companies including PayPlan.
And Margaret Lynch, chief executive of CAS, said many debt management companies were “exploiting” consumers and exacerbating their financial woes.
“The worst cases involve cold-calling, mis-selling, high charges and bad advice – all of which can turn a small debt into a big one, and a big one into a massive one,” said Lynch.
“If you are in debt, the best quality advice is available for free from your local CAB. We can negotiate with your creditors, devise a repayment plan and advise you on how to manage your money better. So the bottom line is why pay for something you can get for nothing?”
David Hill, Glasgow-based business restructuring partner at BDO, said there was also widespread confusion over the different forms of plans available, he added.
“People don’t often know their options and go into debt management plans not knowing there are alternatives. The Scottish Government launched an advertising campaign last week for debt arrangement schemes (DAS), which have advantages over DMPs and none of the disadvantages,” said Hill.
DAS have been amended by the Scottish Government to make them more straightforward and accessible. Under the recent changes, aimed at stemming the flow of Scots turning to payday lenders, interest and charges are now frozen as soon as the debtor’s application is filed with the creditor(s).
“The advantage of a DAS is that once approved, it applies to all creditors and stops interest charges accruing,” said Hill. “Lots of people taking them out will be homeowners and a DAS also protects their property.
“There is no advantage of a DMP over that and no guarantee that it will be free of charges or protect the home. But DMPs are heavily promoted and, as we have seen in mis-selling scandals, people tend to be susceptible to that.”