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The most problematic area of lending that is not regulated is that lenders are free to set terms and conditions as flexibly as they like, charging as much as 29% on some credit cards. The first step to resolving problems with repayment is to reduce the rate of interest and costs of paying towards reduction of debt. - Hunt for better deals on credit cards by transferring debt to cheaper companies
- Increase mortage to 60% of the value of the property to repay more expensive debt
- Pay any spare money into mortgages in order to reduce interest charged on capital
- Claim insurance on loans with monthly balance protection premiums included in repayments
- Consult professionals to restructure financing
Not only can lenders charge high interest rates, but they include the following types of fees in loan products:
introductory fees cancellation fees early repayment fees balance transfer fees cash withdrawal fees balance protection fees administration fees late payment fees
Additional fees all drive up the cost of the debt, and should be included with interest when calculating the final cost of the product purchased, collectively called ‘finance charges’.
The second area is that lenders are not required to verify is whether the customer can afford to repay the capital amount.
Lenders, such as banks and credit card companies, compete for market share. From their perspective, there is one pot of household income in the market to compete for, and the bulk is allocated to mortgages. The remainder is perceived as ‘disposable income’ which lending institutions compete for. The larger the share of disposable household income they can control, the more interest and fees they can collect. The increase in turnover and profit increases shareholder wealth, by increasing the share price of the company, which is measured by anticipated future profits. However, by taking irresponsible risks for the long term wealth of the company, even shareholder value is put at risk.
Enter: the 0% balance transfer and 0% interest on purchases for 9 months. This can be used to gain increased market share in the hope of reaping rewards after the introductory period runs out. The interest may be 0%, but total finance costs often include a 2% to 2.5% fee for transferring a balance or withdrawing cash.
As we have seen from record profits, banks do make it up somewhere. Whilst banks may offer 0% credit on plastic, fees may be increased on mortgages or other fees.
Large lending institutions have consumer data on millions of customers, studying every detail of spending behaviour. They will analyse weaknesses in shopping trends and collect their fees where we are willing to pay high finance costs, making record profits in the process.
In the event that lending institutions get their calculations wrong, they will send out the infamous interest rate increase.
This is the third key area that regulators do not control. Banks can offer flexible interest rate products, and can use it to protect their profits when necessary. This is however a last resort, as it can chase customers away. Never the less, some large lending institutions get away with charging huge interest rates. They may use tactics such as granting you more credit. This is a ‘sweetner’ to encourage you to remain loyal.
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