High-cost credit often grabs headlines, but many mainstream lenders also have products designed to cash-in on peoples’ mistakes and desperation. The new regulator must clamp down on irresponsible lending.
Our latest research found that many Brits are becoming increasingly reliant on credit to pay for everyday essentials such as rent, bills, and food.
It’s hard enough for many people to get hold of affordable credit, but it’s only made worse when their lenders end up charging far more than expected. Let’s look at a few examples from across the credit industry.
The creeping costs of credit
If you’re late making a payment for your credit card, your provider can charge you up to £12 to cover its additional administrative costs. ‘Fair enough’, you might say. And yet, the terms and conditions of some providers also allow for the withdrawal of a 0% balance transfer deal if you’re late making a repayment, or if you underpay one month – even by just £1.
In this case, you’re likely to have already paid a balance transfer fee of around 3%, and may now face paying the lender’s standard APR on the full transferred balance. This hardly feels like a proportionate response.
Meanwhile, payday lenders aren’t restricted in the same way as credit card providers regarding how much they can charge in late payment fees. Penalties are often higher than the true cost to the company, with late payment fees of £20 or more charged by many lenders.
Overdraft fees can also be disproportionate to the ‘misdemeanour’. Using an unauthorised overdraft for just two days a month could cost you more than £50 a month with a number of mainstream providers.
Even catalogue finance is getting in on the act. One firm offers a ‘buy now pay later’ option, under which no interest is charged if full repayment is made within 12 months. Sounds like a good deal. However, if the 12-month point is passed, interest is backdated to the date of purchase at a representative APR of 34.9%, even if you’ve only underpaid by a small amount. This seems unfair to me.
The tricks and traps are legal
Perhaps most surprisingly, all of the examples above are allowed under the current rules. With the Financial Conduct Authority (FCA) taking responsibility for regulating credit next year, we think this is a unique opportunity to clean up the credit market.
Not only does the FCA need to clamp down on unscrupulous lenders, it also needs to intervene proactively to ensure borrowers aren’t caught out by sneaky product design and excessive charges.
What are the sneakiest tricks you’ve spotted from a lender? Have you been caught out by disproportionate charges or unexpected terms and conditions?
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