From Bank Charges To PPI

January 17th, 2008

A part of the high street bank HSBC has been fined £1m for failings over payment protection insurance (PPI). The Financial Services Authority (FSA) said HFC Bank failed to ensure customers received suitable advice between January 2005 and May 2007.

PPI covers repayments on loans, mortgages and credit cards if the borrower is unable to make them because of loss of earnings as a result of accident, sickness, unemployment or death. But it has been widely criticised by consumer groups for being expensive and offering limited benefits to policyholders

HFC Bank is the UK arm of the giant US loan company Household International, which was bought by HSBC in March 2003. It offers secured and unsecured personal loans via a 136-strong branch network, and has 1.5 million customers, many of whom have a poor credit rating.

The FSA said the firm failed to have adequate systems and controls in place which put its customers at an “unacceptable risk” of being mis-sold PPI.

In response, the bank said it was “committed to ensuring that customers are only recommended products that are suitable for their demands and needs”.

“It is, therefore, disappointing that in certain respects our procedures have been found to fall below the standards expected by the FSA and which we set ourselves,” said head of communications Patrick Long.

The FSA’s director of enforcement Margaret Cole said, ‘we announced in September that we would be imposing higher fines for serious failings in the retail market including against firms who fall short in relation to PPI. The fine against HFC – the biggest PPI fine to date and first since our September announcement – is evidence of our determination in this area.

‘HFC’s failings put its customers at risk of buying unsuitable protection insurance and the financial impact on them of unsuitable advice was likely to be significant,’ she added.

The FSA is working closely with the Competition Commission, which is currently carrying out its own investigation of the £5bn market after a referral from the Office of Fair Trading (OFT). It acted in response to a so-called ‘super-complaint’ from Citizens Advice which argued that the PPI market seriously harmed the interests of consumers.

The Competition Commission is expected to publish provisional findings in May 2008 so if you have been miss-sold one of these schemes you still have some time to wait, although there is a possibility that you could receive some compensation if firms are found to have consistently broken the law.

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Tactical Borrowing Explained

January 15th, 2008

Over the past months I have often said that, when it comes to borrowing, a personal loan is preferable to a credit card. This is because it is usually cheaper and carries far less risk of being abused. Unfortunately personal loans are also much harder to get than credit cards and the advice could be worthless, so here is a quick guide to securing the right loan.

If you apply for a loan beyond your reach, you may be offered a much worse interest rate than the ‘typical’ APR advertised or, more likely, you’ll be rejected. This will make your credit record even worse, because making multiple applications in a short space of time looks bad to many lenders. Consider a tactical application. You’re more likely to be accepted if you go for a loan with a slightly higher typical APR.

Data shows that just 20% (approximately) of applicants for the lowest rated loans are successful, because they want the borrowers with the best records. Now compare this with mid-range loans, which cost slightly more in interest, but the acceptance rate is excellent at around and above 40%.

Some loans are flexible: they allow overpayments or a full, early settlement without penalty. There can be clear advantages to choosing a more expensive but flexible loan and then paying it back early. The time and money saved can be used to build up your savings.

If you are rejected for a loan, in addition to having a small mark put on your credit record, you are often referred to secured-loans companies. These will ring to pressure you into buying a loan that may be dodgy and probably expensive, with variable (not fixed) interest rates. You can stop this though. What you must do, as always, is read every page of the small print thoroughly. There will be a check box to stop the lender passing on your details to any other company. Some lenders make it difficult to find, so click on every link and read through it thoroughly.

If your credit record is looking pretty rough, you may find that contacting a company with which you already have a product is your best bet. Don’t just snap up any old loan it offers you though; think carefully about how much it costs, and consider whether you could do better.

Payment protection insurance (PPI ) is hideously over-priced when you buy it alongside a loan. But you’re more likely to get a loan if you request PPI, because the lender makes so much money from it. So, you could hugely improve your chances of getting a loan if you submit a request for it with payment protection insurance included. Then, as soon as you’ve got the paperwork, you send it back without signing it and ask for a re-quote without PPI. It would be very difficult for the lender to subsequently decline your amended application. But please make sure you do send it back without delay or you could end up paying way over the odds.

Lenders can manipulate APRs (the annual percentage rate of interest) to make them look better than they are. Therefore, to compare loans you should ignore the APR and instead look at the total amount repayable and the monthly payment.

Finally, the lender may offer you a longer loan than you ask for, tempting you with lower monthly payments. However, you’ll pay more in interest if it’s spread out for longer, so you should aim to pay off your loan as quickly as you can realistically afford, bearing in mind you still need to have enough money set aside each month to be able to cope with inflation (rising prices) and emergencies.

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Don’t Fall Into the Store Card Trap

January 11th, 2008

Over the past two months I have done a lot of shopping. First Christmas and then the sales have seen me being dragged through as many shops as the rest of the year combined, and in almost every shop I was offered a store card. These can be very tempting since the discounts offered can be generous and it seems to make financial sense.

The downside, however, that is never mentioned by the smiling ladies on commission is that store cards have APR’s that vary from the quite high to stratospheric. Many have reached 30%.

Store cards don’t pose a problem if you are disciplined enough to pay off the balance within the interest-free period (typically between 35 and 55 days). But, if you can’t pay the outstanding balance each month, the interest due on the unpaid debt can soon mount up.

A recent survey has also pointed the blame at store cards for another problem. Up to 20% of people who take out debt consolidation loans are failing to remove other sources of credit. Store cards are a major part of this as people mistakenly believe that if they have cut up their troublesome credit cards the store cards can remain.

The general rule with store cards is that with discipline they can be used to take advantage of the discount offers and then the balance paid off before the end of the interest free period. If you think you may not be disciplined enough to be able to do that then do not take one. As soon as the interest free period has ended then the interest payments will start to reduce the value of the discount and will soon outweigh it entirely.

With interest rates at 30% there are clearly cheaper ways than obtaining credit than store cards and they do rely entirely on the attention grabbing discount available when you sign up. A much better option is to take out a credit card, with interest rates of 14% or lower this means that although the discounts will not be available to you the interest payments will be manageable and not leave you with a large and growing debt problem.

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