EU rules change the game for UK borrowers

January 11th, 2011

EU regulations coming into force here in the UK at the beginning of February mean more borrowers will find themselves charged a higher rate of interest than advertised for personal loans.

At the moment at least 66% of successful applicants for loans should get the advertised rate following a promotion. However, under the EU rules this will fall to only 51%.

The change is due to the incorporation of the European Consumer Credit Directive into UK law, which has benefits for consumers as well as disadvantages. For example, borrowers should also now be given more details about credit agreements making it more difficult for borrowers to conceal unfair clauses.

The revised rules will state that an advert for any form of credit should make it clear what will be charged in interest. The new rules stipulate that the annual percentage rate (APR) that is quoted on an advert must reflect at least 51% of business expected to result from the advert.

Analysts have been quick to suggest ways that customers can ensure they are in the 51% that receive the advertised rates for loans. Primary among these is the vital importance of understanding your credit history before completing any application.

Similarly, demonstrating a high level of awareness of your financial situation and the effect upon it of any loan should ensure that you are accepted for a loan at a good rate, rather than declined or accepted but with a conditional higher rate applied.

Statistics show that under the current rules, for every 100 people who apply for a loan in the UK only 30 are accepted, and of those only 20 receive the rate advertised. From 1 February, this will fall to just 15 people.

The European rules are aimed at ensuring lenders are responsible and offer loans only to people who have a chance of paying them back. Lenders must tell borrowers, often verbally, exactly what will happen if they fail to make their regular repayments.

Lenders must also explain why people have been turned down for a loan if because of black marks found on their credit file.

Demand for loans and overdrafts have been subdued during the last year, according to figures from the Bank of England, as borrowers remain safe during economically uncertain times.

Separate new voluntary rules introduced at the start of the year have given credit card borrowers more leniency over repayments. Card providers will have to give 60 days’ notice of an interest rate increase. Customers will have the right to reject the increase, hand in their cards and pay off their debt at the old rate. They will also be able to pay off the most expensive debt on their card first.

On the face of it these new EU regulations make UK consumers worse off and limit access to cheap credit. However, as the past years have shown, this can be a good thing and the underlying aim of ensuring responsible borrowing and lending occurs is a good thing for the UK economy as a whole.

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The VAT Rise: Perspective and Repercussions

January 4th, 2011

As I’m sure you are all aware by now, the top rate of VAT has risen from 17.5% to 20% as the government looks to boost tax revenues to cut the UK’s level of public debt.

The move has proved unsurprisingly controversial with business groups warning that retailers will be hit by the increase while political opponents of the rise say the poorest will be hit hardest.

In response, the government says the rise is necessary to help bring down the UK’s high (and still increasing) budget deficit.

Food, children’s clothing, newspapers and magazines are still not subject to VAT.

Research by the Centre for Retail Research and online shopping group Kelkoo has suggested that retail sales will fall by about £2.2bn in the first three months of the year as a result of the rise in VAT.

The British Retail Consortium (BRC) has also warned that the rise, announced in the June budget, may have squeezed the traditional January sales period into a concentrated burst around the New Year.

More than seven out of ten retailers polled by the BRC thought that their customers would bring forward purchases to beat the VAT increase.

There have been warnings that with transport costs, commodity prices, business rates and national insurance all rising, some businesses were feeling the pinch very hard.

The rise is particularly unwelcome for those sensitive to the cost of petrol, coming on top of rising oil prices and an increase in fuel duty.

However, it is important to note that other analysts have suggested that the impact on sales may be quite short-lived.

The chartered accountancy firm Kingston Smith has stated that a 2% price rise is unlikely to have a lasting impact, and eventually people will revert to their old spending habits.

The electrical retailer Comet agrees that there is no reason to believe that consumer spending can’t continue at similar levels to those seen in 2010.

The VAT rise is also a concern for the Bank of England. At 3.3%, the annual rise in the consumer prices index is already well above the Bank’s target of 2%, and the increased VAT rate is likely to push inflation towards 4% this year, analysts say.

Perhaps the main concern for consumers are the claims that many retailers are planning to use the tax rise to conceal more extensive price increases. It said 60% of retailers and consumer product manufacturers planned to increase their prices over and above the VAT rise.

But some retailers, including Marks & Spencer and Debenhams, have said they will pass through the cost of the tax rise only gradually, although this may just be because it is not feasible for them to raise all of their prices overnight.
When unveiling the VAT rise over the summer, Chancellor George Osborne said it would raise more than £13bn a year by the end of the parliament, making it a “powerful tool” to combat the budget deficit, without which spending cuts would be even greater.

Many independent analysts have stated that the government had little choice but to increase the tax after Labour left the country with record debts.

It is worth noting that the new higher rate brings the UK into line with other European states. At 17.5%, the UK had one of the lowest VAT rates in the European Union. This may be of little consolation to the consumers feeling the pinch in January but does provide sound economic reasoning for an unpopular but necessary and responsible move.

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