Loans by text message

August 25th, 2009

A news story this week has revealed that, despite all the ringing of hands and rending of garments, the key message about debt that should have been instilled into everyone by the credit crisis has not got through.

The news is that it is now possible to get a loan by text message. The company involved, imaginatively named TxtLoan, is riding on the back of an explosion in ‘payday loans’ aimed at people on a tight budget who are facing an unexpected bill.

TxtLoan lends £100 for seven days, when you repay £110. The deal is being marketed as a way to avoid a £25 bank charge when you slip into the red, and it has proved popular with around 10,000 registered users since it started a few months back.

TxtLoan claims it is not interested in subprime customers. You must have a bank account that can receive direct debits, and you must be employed and receiving a regular income.

TxtLoan claim that the bulk of its customers are aged between 20 and 30, with average income of £25,000. Most repay within seven days, but 10pc do not.

The fees for late payment are designed to be harsh. On day eight TxtLoan tries to take £125 from your account and the amount rises until day 30, when it reaches £200.
If you manage to repay within 45 days, TxtLoan will lend to you again, if not, you get blacklisted. If you make it to 90 days without repaying, your file goes off to the bailiffs.

Of the 10 in 100 who fail to repay on day seven, six will repay by day 45 and another two before the 90-day deadline, meaning that two are facing the bailiffs.

The interest rate on a £100 seven-day loan held for a month is hard to calculate. One debt expert claimed that he got to 200,000% before he gave up.

But this isn’t even what is worrying for me, after all, unlike the opaque Annual Percentage Rate (APR), TxtLoan’s charges are clear, and the amounts it lends are small.
What is deeply concerning is TxtLoan’s website, where illustrations show a sad-looking man with an empty wallet outside a ticket kiosk, someone looking miserable with a restaurant bill, and a woman staring hopefully at a £300 pair of boots in a shop window.

If your financial situation is so bad that you can’t afford some cinema tickets, then borrowing even £100 at what TxtLoan says works out at 994pc APR is a spectacularly bad idea.

If you need the money to pay your rent or buy some food for hungry little ones then perhaps this would be a worthwhile service. But further profligate lending and borrowing after what we have all recently been through demonstrates that many have learnt nothing and are ready to make the same mistakes again. Oh dear.

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The best UK credit deals

August 18th, 2009

There have been some unpleasant, yet hardly surprising figures, released this week that show that RBS, which is 70% owned by the taxpayer, is charging customers more for unauthorised overdraft breaches than any other big high street lender.

Research by Which? found that although other banks have reduced their penalties to make them fairer to customers who are only overdrawn for a short time, RBS has failed to follow suit.

Bank of England figures show that the average authorised overdraft rate in July was 18.9%, the highest since 1995. At the same time, four out of five current accounts pay less than 0.1% on balances in credit and half pay no interest at all.

Rates on credit card purchases and personal loans have also risen this year although the base rate has remained at 0.5% for five months.

Here is a brief summary of the deals currently available in the UK market.

Many of the large high street banks and building societies have raised interest rates on authorised overdrafts but cut rates on balances in credit. Figures from Defaqto, a financial analyst, show that Nationwide is the worst culprit. It has increased the authorised overdraft rate on its FlexAccount by 11.5 percentage points to 18.9% in two years. Barclays meanwhile has increased its rate from 15.6% in August 2007 to 19.4%.

The Co-operative current account charges one of the lowest fees at 15.9%, down from 19.56% in August 2007.The Abbey and Alliance & Leicester current accounts, which are united under the Santander trading name, pay 6% interest for the first 12 months on balances up to £2,500 but a minimum of £1,000 must be paid in monthly.

In my opinion, the best current account without ugly small print is with Cahoot, which gives 1.1% interest on balances in credit and charges 11.8% on authorised overdrafts.

Figures provided by the comparison website moneyfacts.co.uk show that the average credit card rate on purchases has risen over the past two years from 16.5% from 18.1%.

The American Express Platinum cashback card rose from 18.9% to 19.9% last week. Nationwide increased its Classic Visa from 17.9% to 19.9% in May. The best 0% balance transfer deal is with Virgin Money’s MasterCard, which is interest-free for 16 months with 16.6% charged on new purchases.

The Barclaycard Simplicity Visa charges the lowest for purchases and balance transfers at 6.8%, with no balance transfer fee.

Rates on unsecured personal loans have gone up from an average of 8.9% in July 2007 to 13.1%. Egg is one of the worst offenders, with a rise of 4 percentage points to 13.9% on a loan of £10,000.

Some providers have lowered their rates. Although Nationwide is stinging customers with overdraft costs, it has cut the cost of personal loans for existing customers from 8.9% in August 2008 to 7.7%. For new customers, Alliance & Leicester is best at 7.9%.

The legacy of the credit crunch will continue to be poor credit deals for some time to come, especially since the banks are cashing in on the situation. However, before long the competition will return to the market and better credit deals will emerge as banks begin to undercut each other. If you can I would advise potential borrowers to wait for this moment before committing to the market.

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Write off your debt?

August 11th, 2009

This blog has been following the efforts of the Government to combat a swift rise in the number of companies using misleading advertising to convince customers they can have their debts quickly and easily written off.

Figures released in the last week show that one hundred companies offering to write off debts or secure personal injury compensation have been shut down by the Ministry of Justice (MoJ) since April 2007.

A MoJ spokesman said that the companies had been guilty of making misleading claims and using high-pressure sales tactics to get people to pay huge fees.

Although debtors are consistently warned about offers that seem too good to be true, the MoJ is worried that people desperate for a way out of their financial troubles can be vulnerable.

The BBC investigated and found that many claims management firms target people who owe large sums to credit card or loan companies. With the industry growing quickly it is becoming increasingly difficult to police.

The MoJ said some of the firms shut down had been using misleading advertising, claiming credit card debt could be written off within six weeks or that 80% of credit agreements were unenforceable.

In other cases, companies ignored requests for information from the government’s claims regulator or were run by people who had convictions for fraud, which is illegal in the UK.

The rule state that firms must not cold-call potential customers in person and must allow a cooling off period of at least 14 days for anyone considering taking up an agreement.

Yet despite these rules, companies were found to be forcing already debt-ridden customers to pay large up-front fees only for the service to later fall through.

The MoJ has been quick to point out that most claims management companies operate within the rules. However, some companies choose to flout those rules and some also target consumers who find themselves in debt. This is in complete contrast to other companies in the financial sector who appear to act much more ethically, for instance life insurance and stockbrokers.

Claims companies must give customers accurate information about the realistic chances of success and the costs involved in taking up their services. They must also not pressurise anyone into making on-the-spot decisions or handing over money without properly considering the facts.

As ever when this subject is discussed I will conclude by saying that no matter what an advert claims or how pushy a salesman is, the following mantra will always be true. If it looks to be too good to be true then it is. End of story.

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