THE government is to crack down on lenders as consumer debt soars, but it will not stop firms from imposing penalties on borrowers who clear their debts early.

Bank of England figures show that we have borrowed about £11.5 billion this year on personal loans and credit cards.

Reforms proposed in a white paper, published last week, aim to make the terms and conditions of credit cards and personal loans more transparent. They would also force lenders to use fairer methods of calculating interest rates and other charges.

There are more than 1,300 credit cards on the market from about 60 issuers. If you want a personal loan, you have a choice of about 400.

But it is difficult to compare offers, so consumers do not always get the best deal. Richard Mason at Moneysupermarket, a financial website, said: “Consumers find it almost impossible to compare like with like, so sourcing the best deal can be very difficult. The need for standard information when promoting these products is increasingly important.”

Lenders calculate the annual percentage rate (APR) in different ways. So you may pay different amounts of interest on two cards with the same APR.

The Consumers’ Association looked at the way a number of credit-card companies calculate interest. It then applied an APR of 18.9% to all the deals and worked out how much they would charge over two months if you made a £300 purchase, followed by a £150 purchase and then a payment of £100.

If you had an Alliance & Leicester Diamond, a Lloyds TSB Asset Advance or a Bank of Scotland OneVisa card you would pay £9.54 interest. Egg, HSBC and Intelligent Finance would charge only £5.50.

The Department of Trade and Industry (DTI), which produced the white paper, is demanding that the credit industry adopt a standardised way of calculating the APR. However, it has not yet worked out how to simplify the system. It will therefore consult on the issue and make a further announcement next spring.

Some lenders use a credit test to determine the rate. The better your score, the less you pay. The firms quote a “typical” rate on advertising and promotional literature, which is the rate given to more than 50% of successful applicants. Under the proposed laws, at least 66% of people who sign up for the deal would have to pay the typical rate.

Experts welcomed the changes, but some were critical that the white paper does not propose a cap on interest, despite condemnation of extortionate rates by a Treasury select committee. Mason said: “Some store cards charge more than 28%, and you can pay 25% or higher on some loans. We believe the government should consider a ceiling on interest rates.”

The proposed reforms will also do nothing to prevent early redemption penalties. About 70% of personal loans are cleared early, yet nearly 80% of lenders penalise customers, according to Datamonitor, a market-research firm.

Borrowers are charged an average penalty of two months’ interest, according to Egg, an internet bank. It estimates that redemption penalties cost borrowers £332m a year. Lenders that do not charge early redemption penalties include Egg, Intelligent Finance (IF), Cahoot, Virgin, Nationwide, Barclayloan, Woolwich and Morgan Stanley.

If you took out a £10,000 loan with an APR of 7.9%, repayable over five years, but cleared the debt in half the time you would be charged £67.86 in penalties. This assumes the redemption penalty is two months’ interest.

Laurance Baxter of the Consumers’ Association said: “Debt is booming, so it is disappointing that the government has failed to put an end to early settlement fees for all borrowers. Some lenders have already abolished them and the government should force the rest to follow suit.”

The way in which lenders calculate redemption penalties will change, however.

At present, interest is usually staggered, so in the early years a higher proportion of the repayments is interest, leaving you with a larger amount of capital outstanding. From 2006, however, lenders will have to use a method known as the actuarial rule, which should even out the split between capital and interest in the monthly repayments.

Companies will also have to display the penalties for early settlement and the maximum charge will be capped at one month’s interest. They will need to give three examples of the charge at different stages of the loan term, to be shown in an “honesty box”. The box will also display all the costs and rates of interest.