loan-sense.co.uk

The FSA (Financial Services Authority) has fined credit card and loans provider, Capital One Bank (Europe) Plc (Capital One) £175,000 for failing to have adequate systems and controls for selling Payment Protection Insurance (PPI) and for failing to treat its customers fairly.

PPI is applied to a number of credit products including mortgages, loans, credit and store cards, and protects a borrower’s ability to pay the loan in case of accident, sickness or unemployment. Around 6.5 to 7.5 million policies are taken out each year

The regulator says that from January 2005 to April 2006, Capital One failed to ensure that 50,000 customers received important information about the policy - including all exclusions - although they did receive a policy summary. Affected customers were unable to check what they were covered for or if the policy was right for them.

While Capital One’s main business is providing credit cards, loans, and savings accounts from its operations centre in Nottingham, it also sells PPI on a non-advised basis to its credit card and loan customers over the telephone, internet or during the card application process. The FSA’s investigation focussed purely on credit card PPI sales. During 2005 Capital One sold approximately 335,000 UK credit card PPI policies.

The watchdog concedes that Capital One has been proactive in carrying out a full remedial programme addressing the systems and controls issues. Indeed, one part of the remedial programme ensured that those customers who did not receive the policy document had the opportunity to be compensated. The cost of this part of the programme, including potential premium refunds and settled claims, is estimated at around £3 million, of which £1.1 million related to customers after general insurance regulation started in January 2005.

This fine follows two phases of FSA work looking into PPI and the way it is sold. A third phase is underway and by the end of June 2007, the FSA will have visited over 200 PPI firms in two years.

Speculation has increased that best-buy loan rates could hit double figures before the end of the year if a crackdown on payment protection insurance (PPI) goes ahead as planned.

Currently the best rates for unsecured personal loans start at just under 6%, but rates have been rising in recent weeks following the Bank of England’s three bank rate rises since August (see our related story here).

Financial data specialists Moneyfacts warned that a clampdown on lenders selling PPI with their loans products could see rates rise to at least 10%.

Margins on personal loans are notoriously low and lenders struggle to make a profit on the main product. Instead, they make their money on the lucrative insurance policies they sell along with the loans.

Moneyfacts personal finance analyst Michelle Slade said: “With the Office of Fair Trading due to review PPI later this year, if lenders are forced to lower the cost of their PPI cover and revert to a ‘pay as you go’ type policy rather than a single premium, we could potentially see best buy loan interest rates reaching double figures before the end of 2007.”

Many of the best loan deals have disappeared since the beginning of the year. Northern Rock, for example, has increased its rate from 5.8% to 6.5%.

Slade added: “Our research shows that on a loan of £5,000 over three years, only four providers now offer rates below 6%, with more than 40% of the market charging in excess of 8%, and 16% charge over 10%.

With a difference of 14.8% APR between the most and least competitive rates, shopping around for the best deal is an absolute must.”

It makes sense to act now if you are thinking about taking out a loan and grab a good deal whilst lenders are still offering low rate loans. A great starting point is to get The Loan Helper to search the market for you to find the best deal available. With a panel of 16 top UK lenders on hand and hundreds of different loan deals available between them, The Loan Helper is ideally placed to secure the best possible rate for your loan now before lenders are forced to increase them. The Loan Helper offers a free personalised secured loan quotation service with no obligation, so request yours now here.

Unsecured borrowing fell during the last six months of 2006, a new study reports.

Figures released by Alliance & Leicester claim that Since July 2006, homeowners with mortgages have actually reduced their unsecured borrowings by an average of £197 (3%). By contrast households without mortgages to pay have continued to take out loans and use their credit cards – although at a much slower pace than in the past – on average increasing their unsecured debt by £98.

In addition, the appetite for personal loans and credit card debt has diminished. Credit card borrowing grew at its slowest rate on record (4%) last year, below the level of inflation and unsecured personal borrowing grew at its slowest rate since 1994.

Alliance & Leicester believe that base rates would need to reach 8.5% before people experience the same level of financial strain as they did in 1990, when on average homeowners spent almost a third of their income (30.1%) on interest payments on their borrowings. Currently interest payments represent just under a sixth of household income (16.5%), up from the low of 14.1% three years ago.

Spokesperson Chris Rhodes said: “We have entered 2007 with a reduced appetite for borrowing and house buying since last summer. Our latest survey suggests that another base rate rise could cool the housing market further.”

The study also reported that consumers have witnessed an increase in their income, while interest rates on credit cards and loans have fallen.

Mr Rhodes adds: “Consumers have shown an unprecedented appetite to reduce their unsecured borrowing, while their incomes have continued to grow and interest costs on their unsecured borrowings have fallen. This will have taken some of the sting out of the latest increase in base rates.”

It is fair to say that as rate increases continue, unsecured borrowing will become more difficult to manage for some borrowers, and for those with home equity available, a switch from unsecured to secured borrowing becomes a viable mechanism to maintain affordability.

Mr Rhodes continue: “With the average mortgage borrower having well over £100,000 of equity in their homes, many of those who remortgaged will have taken the opportunity to pay down some of their unsecured borrowings – this may partly explain the decline we have seen in their personal borrowing and credit card balances.”

Here at loan-sense we tend to agree with Mr Rhodes on this point, although there can be many cases where borrowers may have a fixed or capped mortgage in place at a rate that’s better than anything available in the market, or they may have experienced some adverse credit since taking out their current mortgage, again barring them from re-mortgaging at a rate as competetive as their existing deal. In these circumstances, a remortgage to refinance unsecured debt is less attractive and would probably constitute bad advice, however the opportunity still exists for borrowers in these circumstances to utilise their home equity to reduce the cost of their unsecured borrowing by converting it to a loan secured by a 2nd charge on their home.

The first step to reducing your outgoings by this method is to request a free no-obligation quote from The Loan Helper. The Loan Helper has access to hundreds of deals from a panel of 16 top lenders and will be able to find you the very best deal for your own individual circumstances.

Further to yesterday’s article on Typical APRs, today’s related article covers another oft-used tool in loan advertisments, the ‘from’ rate.

With lenders being a little restricted in the keen-ness of typical rate advertised due to the 67% qualification rule, the obvious solution is to tell potential applicants what their best rate is, hence the frequently seen phrase ‘rates from 5.9% APR’ etc, and when you see such a statement on an advertisement it seems pretty straightforward and obvious what that means - ‘this is our lowest rate’, although most savvy consumers will realise that this rate is probably reserved for applicants who represent the lowest risk.

Bizarrely however, the regulations on credit advertising dictate that a ‘from’ rate must be no lower than that which at least 10% of applicants responding to the advert will be offered.

What this means is that a lender may have a true lowest APR of e.g. 5.4%, but if less than 10% of applicants qualify to be offered this rate then the lender cannot legally state it in their advertising, being forced instead to quote a higher rate - one which at least 10% of applicants will be offered, as their ‘from APR’ - e.g. 5.9%.

This is a rule which surely frustrates any credit advertiser in such a competetive market where the top differentiator with which advertisers compete for the consumer’s attention is rate. To have a market leading rate, but be prevented from advertising it is a complete anathema to lenders, leading to a dilemma where a choice must be made; does the advertiser
a) bite the bullet and advertise a ‘from’ rate that is higher than it’s true lowest rate, but is the lowest rate that 10% of applicants qualify for.
b) ensure a 10% catchment of this rate, either by using a bottom rate slightly higher than it could be, or by keeping it super-low but extending it to slightly more risky applicants in order to reach the 10% threshold.
c) just advertise the lowest rate available irrespective of the 10% qualification rule.

in scenario a) the advertiser complies with the regulations, but is competetivley disadvantaging itself by doing so.
in scenario b) the advertiser is again compliant but must either disadvantage iteslf competetively or increase it’s risk at the low-rate end of the market, and increase which must be compensated for elsewhere at the expense of higher risk borrowers paying even higher rates.
in scenario c) the advertiser chooses to neither relinquish the competetive edge of the lowest rate nor to increase risk by offering the lowest rate to applicants who do not strictly qualify for it, instead deciding to flout the regulations and risk the consequences.

This is of course just food for thought, and there’s no suggestion that any credit advertiser is currently considering or undertaking any such thought process or advertising strategy, but considering the possibilities above to manipulate the credit advertising regulations you might wonder to yourself whenever you see a ‘from’ rate quoted in a credit advertisement, ‘what is this advertiser really saying to me?’

a) this is the lowest rate available and more than 10% of applicants qualify for it so we can state it in our ads.
b) there is a lower rate available, but since less than 10% of applicants qualify we cannot tell you about it.
c) this is the lowest rate available, and despite less than 10% of applicants qualifying for it we’re not going to give up our competetive edge by keeping quiet about it despite what the regulations say.