'Bloody stupid loan rule from the EU!' blog discussion

Former_MSE_Lee

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.

Read Martin's "Bloody stupid loan rule from the EU!" Blog.

Please click 'post reply' to discuss below.

Terri31

Is it possible to lobby to get this changed... ?

Gordon_the_Moron

I don't expect to see loan rates that are advertised drop, I just think less people will get rejected.

Advertise a loan at 8.9% and get 100 applications, if you accept everyone you have to offer at least 66 of them 8.9%, if 45 of them are high enough credit scored to be accepted but not high enough scored to be offered that rate, some will have to be rejected. I just think you will be less likely to be rejected but more likely to be offered a poorer rate.

Gorgeous_George

Surely 51% is the majority of applicants. We don't need 51% of the elecorate to vote for a particular party before we are saddled with a government for 5 years - why should lenders have to advertise rates that only a third of appicants couldn't achieve?

I think that it makes little difference... loans can still be compared. In fact, for low risk applicants with the best credit scores, comparisons are likely to be more accurate.

GG

MSE_Martin

Gorgeous_George wrote: »

Surely 51% is the majority of applicants. We don't need 51% of the elecorate to vote for a particular party before we are saddled with a government for 5 years - why should lenders have to advertise rates that only a third of appicants couldn't achieve?

I think that it makes little difference... loans can still be compared. In fact, for low risk applicants with the best credit scores, comparisons are likely to be more accurate.

GG

George - its not applicants - its accepted applicants. And you dont know the rate you'll pay until AFTER application - which hits your credit file.

So its not 51% of applicants get it, its of those accepted. There is no problem companies having a few different loans at different rates with different criteria. It works in cards.

Funnily enough in this case the British Bankers Association i've heard (not confirmed) isn't happy with the change either.

wozearly

Gordon - not sure about the rejection argument. Intuitively, the bank is only going to outright reject customers that it was always going to reject (ie, bad credit risk).

Generally they have a vested interest in offering the loan to everyone they deem creditworthy, and ideally at a higher than advertised loan rate for their own profit margins - especially assuming that once offered a loan then customers are somewhat prone to saying 'yes' rather than start the whole conversation again with another bank in the hope of getting a better rate (especially as that bank is likely to do the same thing and each additional application makes your credit score worse, leading to a worse rate, etc.).

To illustrate Martin's point, I'll use a slightly tweaked version of your example for a £10,000 loan, 100 applicants, a 10% advertised rate and assuming there are no defaults, etc. so the bank reaps the entire interest as profit.

Currently, 66 of those 100 applicants have to be offered the 10% rate. The remaining 34 can be offered a higher rate, for argument's sake 15%. From the bank's profit perspective, this is:

£66,000 = 10% of £660,000 (£10k x 66)
£51,000 = 15% of £340,000 (£10k x 34)
= £117,000

If the new rules were adopted straight, the bank could instead go for offering 51 applicants 10% and 49 applicants 15%:

£51,000 = 10% of £510,000 (£10k x 51)
£73,500 = 15% of £490,000 (£10k x 49)
= £124,500

A nice £7.5k windfall. However, as a competitor bank who was happy getting £117,000, I could lower the headline rate to 9% to entice more customers to apply, yet my guaranteed profits would remain healthy:

£45,900 = 9% of £510,000 (£10k x 51)
£73,500 = 15% of £490,000 (£10k x 49)
= £119,400

In reality, that lower rate would entice more applicants to my bank compared to the original bank because of the better headline rate, so all things being equal I would make even more due to having more customers. However, the original bank's likely response would be to drop their rates to 9%, and we'd both settle at slightly lower headline rates (and, in this example, slightly better profit margins).

There is no real need to make life better for those not being offered the headline rates (especially when we don't know what % we would theoretically have been offered under the 66% system) - particularly if every bank is up to the same trick...so as a result, more people end up paying more, even though the headline rate falls.

In reality the rates offered would be more varied and not just dramatic 5% steps so it would be a less obvious change to applicants, but the same principle could be expected to apply.


I completely agree with Martin. An incredibly bad use of the word 'must' where 'at least' would have been a much better consumer outcome.

Gorgeous_George

MSE_Martin wrote: »

George - its not applicants - its accepted applicants. And you dont know the rate you'll pay until AFTER application - which hits your credit file.

Surely the campaign should be to stop applications adversely affecting credit files if the application is cancelled by the applicant.

I knew it was 'accepted applicants' but failed miserably in my message.

So, if Lender A lends only to low risk applicants, they could advertise a typical rate of 7.5% (even if they had to cover 100% of accepted applicants) whereas Lender B lends primarily to higher risk applicants and has to advertise a typical rate of 15% (for 100% of accepted applicants). I don't see why it matters nor how it helps borrowers decide which lender to choose.

wozearly - it just doesn't work like that (IMHO).

GG

Richard019

If the new rule is that 51% have to receive the headline rate rather than the 66% at present, could the reduction be cancelled out by passing a law saying that 15% of people accepted have to be offered better than the headline rate?

I know on the face of it the banks won't like not being able to advertise their best rates, but in all liklihood it would make no difference to them or their adverts as they'd make the difference nominal:

If a loan is advertised at the moment at 7.9% then 66% of successful applicants have to be offered it at that rate.

The new rules with the additional one I added would probably see 51% offered 7.9% and 15% offered 7.89%. By skewing the allocation so that the 15% were the smaller loans the difference would be even smaller, to the point of being negligible.

mememememe

I don't really think it's appropriate to have bl***y in the title: the word is offensive to many people and it's not really professional to have it showing (virtually) on the front page of this major website!

oakhouse13

Today's email

"Why's it urgent? All these loans are typical rate, meaning only 2/3 of accepted applicants get the listed APR. From 1 Feb a ridiculous anti-consumer EU rule means this drops to 51%, so your chance of getting the top rate drops."

I don't agree. This is like a stronger message on cigarette packets. I welcome it. It will put people off thinking about taking out loans. I think your attitude is coloured by the fact that you make a lot of money from selling debt, admittedly you only recommend what you have theoretically calculated is the best debt but in reality you can't possibly know what is best. What you put into your calculator is not what happens in real life.

Your reference to urgent I read as a sales opportunity to drive people to apply for loans before the new legislation comes in. I realise you will not agree with my view and thank you for allowing me to publish it.

Gorgeous_George

oakhouse13 wrote: »

... I think your attitude is coloured by the fact that you make a lot of money from selling debt,...

Who?.............

GG