CANNEX releases personal loan ratings and guidelines
CANNEX has released its ratings on personal and car loan products and has provided a brief tips for people on loan products. According to CANNEX, when considering loan products, people should consider fees like application, establishment, documentation; on-going and encumbrance have in common in addition to interest rate. But there is more. Early, partial and missed repayment penalties can see the unwary making a donation towards the lender’s annual profit.
CANNEX data reveals that even an uncomplicated product like a personal loan has been saddled with fees of varying degrees and in order to navigate the current fee environment, consumers should be aware of these fees and how they can affect them.
Some institutions insist penalties are not penalties but merely cost recovery charges, particularly in the case of missed payment penalties. It is generally felt that penalties for missing a payment are at the core of consumer unrest over penalties and fees in general.
The interesting point in this discussion is the dollar amount in question. One would assume the recovery of costs in the case of a late payment would be similar in all financial institutions, yet each institution charges a different amount. Does this mean that the true cost varies greatly, depending on the size of the institution, the cost-effectiveness of protocols employed or whatever other factor is at work in the pricing structure? It is not so much the issue of a penalty charged, as the amount that has upset consumers. This had led to the fairness of all fees and penalties being questioned, as is the issue of enforceability.
The fair versus unfair fee debate is now increasing with Choice and the Consumer Action Law
Centre combining to provide consumers with an avenue for recourse, not dissimilar to that being undertaken in the UK and to a smaller extent, New Zealand.
For consumers, there are fees and penalties that can be avoided or minimized. The trick is to know what is what and take evasive action before you see red.
Bank or Credit Union:
Determining which institution is better to borrow from is not as simple as searching around for the lower interest rate on offer. Interest rates are important but, as the table below shows, the differences in rates between banks and credit unions are not significant. Typically, credit unions offer a lower minimum interest rate on variable and fixed rate personal loans. They also tend to go slighter higher than banks at the other end of the scale but on average there is not much in it.
The popular variable rate products for both banks and credit unions are those with interest rates in the range of 12.5% to 15%. When it comes to fixed rate loans, banks and credit unions do their business in the 10% to 12.5% range.
The overall analysis shows that credit unions offer marginally better interest rates than banks in fixed rate loans while the reverse is true in variable rate loans. While interest rates can be seen to be competitive between banks and credit unions, the examination of fees and penalty fees charged by each is more revealing.
Application Fees:
Right from the beginning, your personal loan could cost you a hefty application or establishment fee of up to $250. 90% of bank variable rate personal loans have this fee attached, compared to under 68% of credit union loans. On average, credit unions are $33 cheaper in this area for a variable loan.
When looking at fixed rate loans CANNEX found that 95% of bank and 57% of credit union products have an establishment or application fee.
For a fixed rate loan application fees with banks can be as high as $250 or $200 with credit unions while $200 is you will pay on a variable rate loan with both institutions.
Establishment fee:
Establishment fees can also appear as documentation fees or, in the majority of cases, they act alongside each other. When searching for a loan, consumers should note whether the documentation fee is over half of the charge assigned to the establishment fee.
It is worth noting that no bank products in this area have a documentation fee, while over 6% of variable rate credit union products and 28% of credit union fixed rate products do. When it comes to evaluating personal loans, it is really a case of applier beware.
Inadvertently choosing a personal loan with a high establishment fee makes a real difference to the bottom line you have to pay back. You could, for example, sign up for a $10,000 loan with a $250 establishment fee instead of, perhaps, choosing a loan with a cheaper $100 establishment fee. As you can see this move would blow your interest rate of 13% out to 17.85% in the first year, doubling the financing cost for the first 12 months. Needless to say, you would be much better off paying the extra $150 directly into your loan. The less you borrow, the more impact a high establishment fee would have on the overall cost of the personal loan to you.
Ongoing Fee:
Monthly, quarterly or annual ongoing fees can also make a dent in your pocket, particularly if you have borrowed a low amount of money. Some banks charge ongoing monthly fees of up to $10 which does not sound much but when you multiply it to $120 per year it translates to $360 for a 3 year loan.
If, for example, you had borrowed $10,000 for 3 years, a monthly fee of $10, added to an interest rate of 13% would mean you are effectively paying an interest rate of 15.12% for the 3 year life of the loan. It you had borrowed $25,000 under the same scenario, the set ongoing fee of $10 is not so much of an obvious sting and lessens in significance in the overall cost of the personal loan.
Ongoing fees apply to 90% of banks’ personal loans, yet they feature in less than 10% of credit union loans.
Miss a payment – go to jail:
Expect to pay up to $25 if you miss paying your personal loan even by one day. That is the maximum a credit union will add to your bill, with the maximum bank penalty close behind at $45. On average though, banks charge $36 and credit unions $22 for a missed payment penalty on variable rate personal loans.
On these same loans, 70% of banks and nearly 32% of credit unions will debit your account if a repayment is omitted. The percentage is slightly higher for fixed interest products.
Many of us are guilty of the occasional misdemeanour but does the punishment fit the crime? Not according to general consumer sentiment.
Early re-payment charges:
Paying out your personal loan earlier than the contracted time is an ideal situation but it can be soured a little if you are slugged with a hefty early repayment penalty. CANNEX data has uncovered early repayment penalties of up to $300 for a bank fixed rate personal loan – the average being approximately $100.
Early repayment penalties apply to 70% of fixed rate products and 30% of variable rate personal loans from banks. As a contrast, only 4 of 173 credit union variable personal loans come with an early repayment penalty of $200, while fixed rate products attract no early repayment penalties from credit unions. Avoid learning about an early repayment penalty the hard way by noting this at the outset when shopping around.
If you aim to pay your loan off as quickly as you can, think twice before you rush down to your credit union waving that tax cheque. You may be about to cost yourself $20 under the guise of a partial repayment, or lump sum, fee. A tiny percentage of credit unions still charge this fee while banks do not.
Car Loans: The difference between new And used:
There exits a difference in car loan products when you are buying a new or used car. The difference is due largely according to the perceived risk by the lender. Typically, a loan for a new car will be a lot higher than that for a used car, even though the interest rate charged for both loans is similar.
When comparing fees between the two types of car loans, CANNEX note that application or establishment fees are slightly higher for new cars compared to used car loans.
These fees can be as high as $200 but on average, they are $120 for new car loans and $113 for used cars.
Another fee to watch out for is the encumbrance fee or REVs as it is known in the trade. This fee is charged to cover the cost of ascertaining if there is any previous claim to the car’s ownership title that would affect the lender. CANNEX notes that an encumbrance fee can be as high as $65. There is no justification for this amount as the encumbrance fee is mandatory and is set by state governments. It is typically around $15. If encumbrance fees are not identified separately, they are likely to be included in the application fee.
Analysis shows that new and used car loans charge relatively similar fees with the exception of documentation fees which are twice as high in favour of new cars. Moving into the area of penalties, a small number of car loans have early repayment penalties. These average out at $200. Institutions justify these fees as a measure of restitution for interest income not received due to the early repayment of a loan, particularly a fixed interest loan. However, if you intend paying out your loan early, you can avoid this condition.
If you miss a payment on a new car loan, you could be hit with a fine of $50. This is $15 more than the maximum on a used car loan and twice as much as the same penalty for a personal loan used for purposes other than a car. This seems extraordinary and may indicate a lender trying to recoup revenue from a loan offering low interest. It certainly is one area consumers should check before deciding on a car loan.
CANNEX Ratings:
With the range of fees and penalties attached to all banking products, there is simply no substitute for shopping around. Personal loans, whether used for consolidating debts or buying the recent model sports car, are no different. They can be a minefield of fees and penalties which the canny consumer should avoid. CANNEX Personal Loan star ratings will help you compare products to find the ideal five star loan for you. Personal loans are traditionally the domain of credit unions and building societies. Only one bank, St George, appears in CANNEX list of five star products.
For CANNEX star ratings, it evaluated 68 secured personal loan products, 116 unsecured personal loans and 336 car loans. Only the top 5% in each category were awarded five stars for superior value.
CANNEX ratings can be found in their company website.
25-Jun-2007