Paying for debt advice unnecessary and costly says research

The Momentum UK Team 05 November 2012

Research suggesting inflated charges and poor success rates have raised concerns over the practice of many fee-charging debt management companies.

The Center for Research in Social Policy at Loughborough University has found that fee-charging debt advice companies, are often over charging for advice that has a lower success rate than free alternatives.

Rather than shopping around or enquiring about options, many are paying heavily inflated rates for advice that can be available to them absolutely free from other sources. The research suggests that those who are coming forward for debt advice are making decisions when in distress based on poor information.

The research also points to evidence that paying for advice can possess a lower chance of success than free advice. This could be down to the amount of money being charged by some companies. Around one in ten people questioned were paying for their service fee up front, a practice that many wish to see banned.

One person questioned was paying £400 a month into a debt management plan, £300 of which was being retained by the company. Another person questioned had to pay two installments of £662 for simply setting up a plan.

Commenting on the research, Joanna Elson, Chief Executive of the Money Advice Trust said:

"People deal with unmanageable debts in a variety of ways, but far too few people take the one step that stands the best chance of making a real difference, that is seeking free, independent advice.” 

The charity is concerned that many under the pressure of managing escalating debt may be taken advantage of.  Elson said:

"We have long held the belief that, whilst people should be free to pay for debt advice if they choose, that decision should only be made from a truly informed position. The research makes clear that around half of those paying for debt help are not aware of the free alternatives.”