Smart Loans

Consumers urged not to take loan interest rates at face value

23rd January 2011

Despite online research being a great indicator of the rates which can be expected from secured loans, there have been staunch complaints that some loan companies are hiding charges in the event of a change to the way that the borrower pays.

The Government, which has taken a very firm that this type of practice should not be applied to already financially vulnerable customers, has banned the application of these surcharges to any new loan agreements which have been taken out. However, as this law does not apply retrospectively, there can be millions of those remaining with a long-term secured loan that may not be aware of how a change in circumstances can result in a hilt in the payments being made.

When a secured loan has a fixed period, it can be rare that the agreement is for your benefit exclusively. The loan company knows that a 25-year agreement with you to pay back £10,000 will also mean the opportunity to receive interest every month that a contribution that is being made. As such, loan companies at times can see themselves as entitled to levy what are known as redemption penalties onto their clients should they wish to pay early.

Early redemption penalties apply to a vast range of secured loans, and they could also come into force if a person wants to start paying more monthly in order to conclude their loan quicker - resultantly, do make sure you consider any clauses regarding overpayment which might be seen in the documentation of your secured loans. The penalty you would anticipate is high if the loan you have taken out is relatively new (say less than a couple of years old in a 25-year agreement), and gets transitionally less the further you are in the agreement because the creditor has usually received a substantial amount of interest back if you are 10 years into repaying. As mentioned earlier, Government intervention has meant that there is a cap on early redemption penalties for those who have taken out a substantial secured loan of at least £25,000 - a loan company would only be able to charge their borrowers eight week's worth of interest on the loan at the most should their customer settle in advance of the repayment term's conclusion.

With regards to secret surcharges on secured loans, it can also be worthwhile to take a look at what was once known as the Rule of 78 - now outlawed. This rule mainly involved a different approach to calculating interest which meant that some consumers ended up paying far more money on top of their borrowed amount. With the calculations and terminology complicated within the Rule of 78 - the fact that it was difficult to explain to consumers made it an even worse clause on secured loans to justify.

The advice for consumers remains the same: always make sure you read the small print to see if there are any additional terms and fees which you could be confronted with during your agreement, as you could find a far better deal elsewhere.