Help required - First Plus (Rule of 78)

Scrooge_McDuck_5

Hi readers,

I am looking for some help & I can offer my opinion on the service from First Plus.

Around two years ago I found myself in the unfortunate position that I felt I had to approach on of these secured loan companies.

After reading the literature which indicated a repayment penalty of #19.46 for every thousand within the first 20 months I decided (as a last resort) to borrow #35,000.

Happily, I was able to repay this debt last month. Unfortunately, the repayment penalty wasn't #19.46 for every thousand, it was #85.00 for every thousand.

A difference of approx #2,293 this is more than 400% more than the literature quoted. I ended up re-paying close to #38,000 as well as paying arround #300 a month for 20 months!

Granted the literature was based on a "typical APR" of 8.9% and my APR was 13.2%. This is where my questions and challenges to First Plus come in;

1. What are the rules about quoting a typical APR?

2. How does a diference in APR from 8.9% to 13.2% translate to such a big cash difference?

3. Can I follow this up?

Could anyone tell me what the complaints process is? I have tried complaining to First Plus but they havn't answered my questions (1 & 2 above).

They have however told me about the rule of 78. Everyone should avoid lenders using this rule at all costs! Even the advisor I spoke to at FP agreed that this rule is unfair (and about to be made illegal - apparently).

I am personally very unhappy with the quality of service from First Plus and my oppinion is that they are not customer focussed.

Feedback and advice would be appreciated.

Robert_Sterling_3

The Rule of 78 has been used since the passing of the Consumer Credit Act of 1975.
The Rule of 78 sets out a formulae for calculating how much interest should be rebated by the lender if a borrower redeems a debt early.
The reasoning behind this was that a balance must be struck between what was fair to the lender and what was fair to the borrower.  The lender is a risk taker.  Where most banks and building societies will not lend "non status"  lenders step in.  They charge higher rates.
They expend money in setting up a loan, lets say for 10 years, at a fixed rate.  The borrower agrees to the terms and conditions of the loan.  The borrow often seeks to borrow over a long term to keep the monthly payments down.  The lender likes the borrow to sign for a long term loan because for technical reasons this makes the APR lower ( for the cognescenti this is due I think to the amortisation over a longer period of various fees etc ).
On day one the lender is pleased with the contract and the borrower has got the loan and is happier than he would be without the loan.  All seems OK.
It is often the case that later the borrower in a sense wants to break the contract and pay off the loan.  Normally you can't just break a contract.  But the Consumer Credit Act does allow you to ( helps the borrower ) but the interest is dealt with in accordance with Rule of 78.

The rule of 78 works as follows ( I have simplified it a bit here).

On day one everybody concerned knows how much capital is owed and how much interest will have to be paid over the period of the loan.

Let us call The Total Interest to be paid   I
Let the number of month of the loan be   m
Let the number of months remaining when the borrower "breaks the contract" or if you prefer "seeks an early redemption of the loan" be denoted by   r

Then the amount of interest which the borrower  will be let off as a result of the early redemption is:-

  I * r *(r-1) / m * ( m-1 )

Just as an example half way through a loan the borrower will be let off about a quarter of the total interest which would have been paid if the loan continued to maturity.

The lender is not allowed to terminate the loan early.
The borrower is allowed to terminate the loan early.
Some of the borrowers default on their payments and sometimes they become bankrupt.
Sometimes not only does the lender not get all the interest due he also loses some of the capital which has been lent. 

The Consumer Credit Act of 1975 may be amended soon.
It could make life more difficult for the lender if the Rule of 78 is relaxed.
It could make things more difficult for non status borrowers too as the Non Status lenders might have more stringent criteria regarding who they will lend to.

This is not legal or financial advice.
It is an attempt to explain the Rule of 78 and why it was introduced.
It is intended to state an impartial view which is critical of neither the borrower nor the lender.
It is not an answer to the original post in this thread which I have little doubt will be tackled by others.

RS

MarkyMarkD

The advertising literature is virtually irrelevant, given that the lender can decide you are not eligible for the advertised rate.

The binding terms and conditions for your loan will be in your offer document, which you will have signed to accept the loan. That's what you need to refer to, in order to check if they are ripping you off.

Robert_Sterling_3

Reading the terms and conditions of the loan prior to signing it is to be highly recommended.

Rafter

Unless First Plus have made an error in the calculation, there isn't much benefit it complaining to anyone as they have simply applied the rules as laid out in the terms and conditions you signed up to.

Rule of 78 is a bad bit of government legislation from a time when the consumer lending market was very different. You have been a victim unfortunately.

My advice would be to congratulate yourself on repaying this loan, even if it has cost you more than you hoped or expected and hope you never have to take out a secured loan in future, although in the future the rules should be stacked more in favour of the borrower.

Good luck.

R.