27 April, 2017
Another non-story by the Daily Mail off the back of some research by Confused.com
Used car sales people are apparently pressurising people into taking car finance at the time that they are in the dealership. Funny that. So, someone who is tasked with making a sale, tries to make a sale. Now, here is the thing. The point that is being made about this being “bad” is predicated on the idea that we consumers are vulnerable and more than a bit stupid.
If someone goes into a car dealer and signs a deal for a car at 12% APR, then that is entirely up to them. Now, they may or may not be aware that 12% is a high APR or indeed that they may be able to a get a much cheaper deal around the corner. But frankly, it is up to the customer at the end of the day and not some “big brother” authority telling businesses what they can or can’t do.
CAVEAT EMPTOR – Buyer beware. This is the case and always has been the case. It is our prerogative as consumers to shop around and get the best deal that we can for ourselves. BUT, it is also our right to strike a deal at any price we wish.
The concept laid out in the article would leave an American with their head shaking.
The only explanation for the need to “regulate” these scenarios is if we are indeed walking blind into the world of idleness, entitlement and vulnerability. The “Snowflake” generation if you will.
The article also seems to point out that charging 30% interest on a sub-prime loan is scandalous. This is indeed compared to the “financial crisis” by Baroness Altmann. Yet the article seems to bring in the idea of responsible lending as an issue. Seems entirely responsible to charge a higher rate of interest to a customer who presents a higher risk to the lender. The lender could, of course just tell the potential customer to do one and not lend them any money. Now THAT would be considered as discriminatory and no doubt there would be faux outrage that money lenders would not lend to someone who has a poor credit history.
So, a non-article really.
To come at this issue from slightly different angle. Let’s look at the stated APR of 9.4%. This is the number that the article is hung on. Is this so bad. Well, it depends. There are many ways in which company’s access money and then pass that on to consumers through loans and such like. They may be a large bank in which case their treasury rates would be very low. They might want to make a margin of (say) 4%. If the treasury rate was (say) 2%, the all-in output rate (that which the consumer will pay) would be 6%. Now if the customer did not have an exemplary credit history then the lender could do one of several things. They could put a charge over the vehicle. This means that they effectively own the vehicle until the debt is paid. If the customer defaults, they have the right (under Consumer Credit Act rules) to repossess the car. Even if the customer is not a bad lending risk, then the lender might still do this. The other option for lending to the bad-credit customer is to add an additional risk premium to the price. Let’s say they have a 20% chance of defaulting, the lender might want to add (say) 2%. So, we can easily get to 8%, not that far away from the “shocking” 9.4%. The best deal of 3.2% stated is no doubt conditional on other things and will only be available to the very best consumers from a credit perspective. Interesting how they don’t mention what the AVERAGE rate was?
Now let’s look at some things that are truly shocking: The average credit card interest rate in the UK is 15.74% as stated by Creditcards.com
Given that the UK Bank of England base (or Repo) rate is stagnating at around 0.25%, that is an ENORMOUS return. We appreciate that these companies probably cannot access treasury rates anywhere near the Bank of England base rate (they can), there are some organisations that lend money that do indeed have access to this very low rate – The Clearing Banks.
Now, the average UK variable rate mortgage interest rate is hovering around 4%. Given the base rate of 0.25%, this represents a gross margin of 1600%. Yes, you read that right – 1600%. Bankers may well chime in with technical reasons as to why that is not the case such as “thin capitalisation” rules or “arm’s length lending” or “term liquidity premiums”. I think you may well be able to explain a fair chunk of it away, but not 1600%
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