Ancillary credit costs: From a feel-good loan to a debt trap

What has to be given to banks is undoubtedly the creativity with which the same products are always marketed and advertised – would it not always be the consequence that people slip into the debt trap again and again who can be led to make wrong decisions based on placard statements.

One of these advertising messages is that of the (expensive) installment loan or consumer loan as a “feel-good loan” at low-interest rates.

Inexpensive feel-good credit – what more do you want?

Inexpensive feel-good credit - what more do you want?

The interest rate level is currently unknown and times like this will not come back anytime soon: borrowing money now is exactly the right decision with effective interest rates that are barely above the inflation level. The only problem here is that the promised interest is hardly what you will ultimately receive when you conclude the loan contract and a feel-good loan with low and cheap rates will quickly become more expensive than you can imagine.

In practice, the interest rate actually offered on installment loans differs by 2 to 3 times the advertising interest or lure interest – this has nothing to do with a mere advertising promise or even advertising lies, after all, the low-interest rates shown in the displays and prospectuses become you Conditions also given to customers. The proportion of customers that comes into question due to a very good credit rating and a high score in practice is 1 – 2% of all customers – to put it loosely, these are customers who do not need the loan or the money.

The majority of customers receive the so-called 2/3 interest, which has actually had to be shown in addition to the borrowing rate since June 2010. This is the effective interest rate that 2/3 of all customers would actually receive – and due to the often poorer creditworthiness of the majority of customers (measured against the ideal customer), this interest rate is often 2 to 3 times higher due to a higher debt interest rate and higher ancillary credit costs like the front-end load or processing fees.

However, not only the higher effective interest rate makes the installment loan more expensive (euphemistically also consumer credit / feel-good credit), but above all expensive additional products such as insurance policies. If you add up all the factors here, the dream interest rate of a few percents (2 – 4%) becomes an effective interest rate that can be almost 20% and more – and is thus well above the bank’s overdraft and overdraft interest rates, which are already too high!

In the case of an installment loan, the long term, which is measured by the comparatively small sum, adds to the cost of the loan. Basically, the longer the term, the more expensive a loan is.

Aggressive advertising and hidden costs

Aggressive advertising and hidden costs

If you take a closer look at the installment loan, this financial product is rather unspectacular: Loan amounts of 2,000 to 10,000 dollars over a term of usually 36 to 60 months (higher amounts for longer terms) are lent at fixed rates without the provision of collateral rarely more than the last 3 proof of salary since installment loans are almost only given to people who have a fixed income from a fixed, permanent employment contract.

Collateral can largely be dispensed with, since, if the loan should not be repaid, wages (therefore: self-employed, pensioners, students are often excluded) can be attached by means of garnishment. The amount of the loan is usually set up so that, if the worst comes to the worst, it can be recovered with 3-6 seized monthly salaries – so the bank is also secured in the event of termination since the term of notice for most employees extends over this period.

The amount of the loan, which is why the advertising name consumer credit, is designed so that small wishes can be apparently easily financed along the way, such as a new living room facility or a new kitchen – and you still have something for little things. Since there is usually less than a week and sometimes even several hours between the application and payment, the installment loan is also often advertised as an instant or quick loan.

From the banks’ point of view, aggressive marketing is not aimed for nothing, because on the one hand the installment loan is considered to be very fail-safe – only 3% of the loans are canceled in whole or in part, 90% are serviced in accordance with the contract, and 7% result in minor breaches of contract (late payment ) – and on the other hand over 130 billion dollars in sales alone, installment loans are achieved. So the business is highly lucrative!

Expensive extras: good for the bank, bad for the customer

Expensive extras: good for the bank, bad for the customer

How does the mentioned increase in interest rates come about? The effective interest rate alone, even for customers with a poor credit rating of 2 – 4%, is often 7 – 11% – but it is still far below the “20% and more” brand we have described!

Here the banks make use of a trick: Additional options, such as credit insurance, do not have to be included in the effective interest rate because they are not a binding part of the product – even if they make it significantly more expensive! In practice, however, these freely selectable additional options can be regarded as binding, since they are either advertised to the customer as an indispensable extra or, in the case of rejecting customers, the credit is sometimes not approved due to the risk being too high.

Optional credit protection like residual debt insurance certainly sounds good: protection against death, illness or even unemployment and thus also against debts that you can no longer pay. Another problem here is that the small print usually reveals that this protection is not comprehensive and unrestricted. The core component of most credit default insurance, for example, is that they only cover for up to 12 months and only after a 6-month period. How the borrower bridges the 6 months or what he does after the 12 months is not the problem of insurance.

Practical examples

Anyone who, as a 2/3 customer aged 30 years, would like to have a loan for a sum of 10,000 dollars with a term of 36 months, at a 2/3 interest rate of 7 to 8%, must take out credit default insurance with costs of 450 to Calculate 1,100 dollars (depending on the size) – this means that the interest rate would rise by a further 4.5 to 11%.

Customers over the age of 45 sometimes get even worse conditions: for a loan of a sum of 30,000 dollars over a term of 72 months, a 2/3 interest rate of 12% and more must be expected – credit loss insurance usually comes in at this scale up to 11,000 dollars (!) to book, which corresponds to an effective loan interest rate of well over 25%.

Way out of the “feel-good trap”?

Way out of the "feel-good trap"?

Residual debt insurance or a differently named policy concluded with the credit contract can also be canceled afterward if you have an eye on what you have actually taken out, but: the commission that has accrued for the brokerage of the insurance is in usually excluded. Since this is sometimes up to 50% of the insurance premium, the damage is still enormous even in the event of termination.

In addition to the termination of the premium, the only way to escape the “well-being trap” is to take the lawsuit to court, since loans that are on average 100% more expensive than comparable average loans as usury and can, therefore, be classified as immoral. If the outcome of the procedure is positive, and thus the loan agreement is reversed, the loan amount must be repaid (de facto immediately) – the only consolation: without interest and minus paid installments.

Debt restructuring: way into the debt trap?

However, many consumers and borrowers are still looking for a way out of debt rescheduling, which ironically was often offered by the same lender – of course with residual debt insurance, which starts the game all over again.

Here, too, the way out, should you have fallen for this game, is only through the lawyer with the specialist area of ‚Äč‚Äčinvestment law and consumer centers, in order to be able to reverse the contracts as completely as possible.

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