Fresh Calls for Tighter Lender Regulation as Credit Costs Rise

Fresh Calls for Tighter Lender Regulation as Credit Costs Rise

UK borrowers are paying way more than expected for personal loans as the difference between the actual and advertised rates rises. Leading lenders in the UK are currently advertising fixed rates on typical loans at 2.8 to 4.9%, but in reality, borrowers are paying an average APR of 7.3%. This translates to approximately £204 million more every year according to the Centre for Economic & Business Research (CEBR) which discovered that these representative rates have been unrepresentative for years (since 2011).

Critics of this practice have boosted their calls for tighter legislation over marketing using these misleading rates after a survey discovered over 80% of applicants trust the advertised rate. According to current rules, at least 51% of borrowers must be offered a rate for it to be advertised. Considering personal borrowing amounts to more than £209 billion (compared to £196 billion same time last year), UK borrowers are feeling increasingly dissatisfied, mislead and confused according to industry commentators.

Shawbrook Bank, which co-authored the report, warns that this lack of transparency makes it impossible for borrowers to make informed decisions on affordability from the onset of the loan application process. Lack of transparency has in fact contributed to many people taking larger loans than they would otherwise take if they knew the actual rate initially.

In fact, this tendency can be linked to increased cases of defaults according to the CEBR research. Since the first quarter of 2016, lenders have recorded a rise in default rates for unsecured consumer loans in a record 8 out of the last 9 quarters. This clearly shows the importance of giving borrowers accurate information before they apply for loans. The research has come out immediately after the regulator reviewed the UK’s high-cost credit market last week.

There are millions of Britons depending on doorstep lenders, overdrafts, payday loans, catalogues, hire-purchase as well as rent-to-own agreements among many other forms of short-term loans in the UK. The FCA is expected to take tough action on lenders found culpable of misleading borrowers and charging high interest rates on a variety of financial products including overdrafts used by approximately 19 million Britons.

The proposals which include capping the total cost of hire purchase products and banning overdraft fees will be subject to consultation for some time. If implemented, the proposals could save UK consumers approximately £200 million every year.

According to Rachel Springall, a finance specialist at moneyfacts.co.uk, the FCA’s proposals to deal with lenders overcharging customers for loan products like overdrafts is welcome since the move would see borrowers enjoy savings amounting to £140 million per year.

Springall acknowledges that many banks have adjusted overdraft structures over the years by abolishing interest charges and introducing flat fees. Although the move has made it easier for customers to calculate charges, flat fees have turned out to be more expensive than interest on an overdrawn balance. The average usage fee for arranged overdrafts has increased to £6.75 (from £4.69) five years ago.

For instance, customers who had overdrawn £300 for two weeks on a Santander Everyday current account would have to pay £14 as charges (£1 every day). However, the same customer with a first direct 1st account would pay £0.33 only in fees based on a 15.9% EAR.

According to Springall, the complex process of comparing deals tends to put some customers off making it hard to make overdraft fees fairer. So, customers who feel they are getting bad deals should shop around for the best short-term loan deals without forgetting about their long-term borrowing needs.

However, some critics argue that the FCA needs to do much more considering StepChange Debt Charity statistics show a record 1.4 million British households used high-cost credit to pay for essential goods last year.

According to the head of Which? Money, Gareth Shaw, unarranged overdraft charges tend to spiral up to seven times more in charges compared to payday loans making it wrong for the regulator to continue delaying action.

Shaw continues to stress on the fact that the FCA expressed concerns on the way overdrafts work last summer but is yet to take action one year later. Shaw states that the government must intervene to make sure unarranged overdraft fees are matched with fees charged on arranged overdrafts. This should take place since many people are suffering because of these rip-off fees yet the FCA continues to delay action.

Mark Scott

Is the Company Director of Swift Money Limited. He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.