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

oakhouse13

Although I am sure that MSE is not involved in selling leads, many other companies are and the most profitable business model behind attracting maximum applications for loans may not actually be anything to do with the advertised product but lead generation.

http://www.dailymail.co.uk/money/article-1348385/Financial-secrets--sale.html

oakhouse13

"Who?"

Martin Lewis, unfortunately because he provides many public service style broadcasts that have helped people manage their finances but on credit cards and on this I think he is wrong.

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antonia1

Martin,

I totally agree, blindly implementing EU rules to the detriment of the British consumer is enough to make me swear (quietly though, I'm in an open plan office). In particular, control of our money markets needs to be based in Britain for as long as we retain our currency.

I also agree that it will cause lenders to lower their advertised rates (or else why do we need any regulation at all) and hence more people to apply for loans (again, why would companies advertise if it didn't attract more customers).

Finally, we need to get out of the situation where some people say "debt is bad" and some people say "debt is good". Debt is a money management tool which, used correctly, can really help. Paying for essentials (I don't mean a new TV, more like roof repairs) may be very difficult for low-income households and credit can help spread the cost, especially if the bill is unexpected. For instance, I had to take out a small short term loan to cover relocation costs when moving to my first job (this was pre-MSE so I didn't understand about how to use credit cards, and didn't get a good deal, but low base rate has helped!).

Gorgeous_George

oakhouse13 wrote: »

"Who?"

Martin Lewis, unfortunately because he provides many public service style broadcasts that have helped people manage their finances but on credit cards and on this I think he is wrong.

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Are you confusng the moneysavingexpert with moneysupermarket?

GG

Richard019

oakhouse13 wrote: »

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.

It's got very little to do with actually taking the loan out as far as I can see. By the time you're applying you've decided you need to take the money out and are comparing the offers from different lenders. It would be nice to know that you had better chances of being offered the products you were applying for than you did of winning a coin toss.

Advertising a loan at a rate which 34% of people won't be offered is nothing short of false advertising* in the case of those people IMO. Instead of clamping down and reducing that level we're being forced to allow them to falsely advertise to more people.

*It may not legally be the case, but the use of the word typical in the adverts means they are typically taken to mean that a typical person will get that typical rate. ie only risky people will be offered other higher rates. You're now going to be in the position where the untypical rates are offered to almost as many people as the typical one.

How can you compare the products before applying?

eg
Bank 1
66% get typical 7.9%
10% get headline+1%
10% get headline+2%
14% get headline+3%

Bank 2
66% get typical 6.9%
15% get headline+5%
19% get headline+6%

Clearly in this unless you're in the 66% you're better to apply to Bank 1 but you have no idea in advance. Because of the better advertised rate you go to Bank 2 and get offered it at 11.9%, when if you'd gone to Bank 1 you'd have been able to get it at 8.9%.

It's too late then though because you already think Bank 2 is cheaper and assume you won't get a better deal elsewhere, especially now you've put the application on your file.

Under the new more relaxed rules it almost encourages banks to act like Bank 2, taking a more marginal profit on the typical rate knowing that people will apply and accept the higher rate having convinced themselves they need the money now for whatever project it is they're doing.

Even under the current rules they should at least be made to publish the breakdown of who'll get what so you can weigh up which product to apply for based on how high you think your likely to score in the credit assessments.

oakhouse13

Am I confusing MSE with Moneysupermarket? No.

wozearly

GG - I'm aware that my example is simplistic and theoretical rather than a description of reality, but the underlying principle holds true.

Speaking more generally, what allows banks to take advantage of the situation is a mix of;

1) Information disparity - applicants don't know what rate they would be offered until applying, whereas its probably safe to assume banks know their own scoring criteria and apply that fairly consistently to each product

2) Barriers to competition - the well-publisiced problem that once an applicant has an offer from a bank it impacts their credit score, so that subsequent applications aimed at comparing the market are more likely to be rejected and/or result in a higher rate, defeating the point of the exercise.

This combination means that a bank has a clear interest in offering a lower typical headline rate as that will, inevitably, attract more applicants hoping to get it that can be 'trapped' into accepting by point 2) and look to make up the money for doing this by charging extra to those not getting the headline rate and/or attracting more applicants. Once one bank moves, the others would likely feel pressured to follow, hence the new equilibrium point at a lower headline rate with more people being offered a higher figure.

I agree that could be avoided if other banks said "We're not doing that - our typical rate is higher because we offer more people the rate we're quoting", but point 2) still means you'd pretty much have to take their word for it.

So even if banks openly tagged their loan products with "This is a lower headline rate because we'll reject a lot of people" or "This is a higher headline rate because we intend to accept higher risk applicants", as a customer shopping around you would still benefit from being able to ask both to give you a speculative quote and then accept the better offer - something which isn't necessarily possible in our current system irrespective of the 66% or 51% typical rate.


You're absolutely right to say the critical issue is removing point 2) from the equation, as then customers could freely compare and choose accordingly.

This would give banks less incentive to pursue manipulative tactics based on information disparity and more incentive to signpost their loan offers better as each application they process but don't get accepted wastes their time (and therefore money).

It could also be a good step towards offering each customer the best rate the bank can afford to offer them based on their credit score, particularly if banks were forced to disclose the mean or median 'average' rate rather than just the typical (ie modal) rate.

This could also be achieved in part by legislating for a higher proportion of customers to receive the typical rate - although you then get the reverse situation where the typical rate rises, although more people will actually get it.


PS. I accept that this post is almost certainly teaching grandmothers to suck eggs in your case, but assuming I've not missed or misinterpreted anything it may be of interest to those who haven't given the situation much thought before now.

Gorgeous_George

The answer is for loan enquiries NOT to impact credit score. If that was the case, everybody could apply to every lender and they would choose the lowest rate offered.

Why should shopping around be seen as a negatrive thing? If I want to buy a car and I check out a number of garages, the price doesn't rise with each enquiry. This would be a much better thing to be trying to change.

Besides, just because it was 'at least' 66% doesn't mean that it wasn't 100%. Making it 51% is unlikely to make much difference (if any) to the headline rate. IMHO lenders will wish to maintain their risk profile.

GG

Gorgeous_George

oakhouse13 wrote: »

Am I confusing MSE with Moneysupermarket? No.

So, where do I get a loan from Martin Lewis (or MSE)?

GG

Xaja

Although Martin is technically correct, this does sound to me like a storm in a glass of water. Yes, the rule should have been phrased more flexibly. But what stops the UK from still applying the 66% rule? We have our own politicians and regulators, who would be absolute fools to overturn our 66% already in place. No-one is going to pull us up about it. There is no 51%-rule police. And if the EU would treathen us with fines, then any judge would agree that the 66% rule is superior and dismiss anyone fining the UK for not applying 51% but a far superior rate. And as a result, the EU would change it's wording on this issue.

What bothers me is how the UK seems to blindly apply everything from Brussels, and preferably interpreted in the worst way possible just so politicians can point a finger at Brussels shouting "it's not us, it's them". Politics requires some intelligent risk taking, and this is one example where this is absolutely justified and in fact a must.

What is an outcry is this: I recently took out a credit card because my current provider had been mistreating me. I could not get an exact figure of the interest rate and limit that would be applied until I actually signed up. This is an outrage! I then have two weeks to cancel the deal in writing. In writing! Turns out I was happy with the result. But why on earth can they not tell me in advance what I'm signing up to, so I can decide beforehand if I want it or not. I don't care about the average. I want to know where I stand exactly before I sign up.