November 14, 2017

Is it worth taking a loan that charges 30 percent interest rate?

Daniel urgently required $11,000 to carry out repair works on his house. Since he was in desperate need for money, Daniel visited a financial service provider in the central division to apply for an unsecured loan. In his desperation, he did not see it important to compare the interest rates, loan repayments fees and charges with other financial institutions to get the low cost loan. Given this, the financial institution Daniel had opted for, promptly prepared his loan contract and assured him that the money was just a signature away.

In his excitement to receive the money, Daniel overlooked the total amount he had to repay the bank. He failed to read the terms and conditions and to ask simple questions related to interest rate and other fees and charges. The loans officer also did not bother to explain the key aspects of the agreement.

After 2 months, Daniel needed additional cash, hence, he revisited the financial institution and applied for an additional loan of $2,000 which was consolidated to his initial loan amount. This time around he decided to read the loan document properly to understand the loan agreement.

To begin with, the total amount financed by this financial institution stood at $14,642 that included a loan protection insurance of $1,476 and stamp duty.

Daniel was shocked to see that his total repayment amount stood at an exorbitant $35,000 to be paid over a 7- year period. Interest alone for this period was $20,450.

Without wasting time, Daniel lodged his case with the Council, to seek clarification on the high repayment sum under his name. The Council obtained Daniel’s loan documents to read the finer details. After carefully scrutinising all the details, it was ascertained that the financial institution was charging an interest rate of 29.97 percent per annum.

Since Daniel had failed to read the loan terms and conditions before signing the agreement, he had no option but to pay the repayment amount.

Time and again the Council had received consumer grievances regarding loan contracts being unfair and unreasonable. This was not the first time that the Council had come across cases where consumers had been locked into contracts with exorbitant monthly repayments due to high interest rates.

The Council is encouraging consumers to do bank shopping before deciding to settle for any bank. Bank shopping will pay off for in the long run and ensure lasting savings. Had Daniel compared the interest rates on unsecured loan from other financial institutions, he would have saved few thousand dollars.

The Council’s recent survey shows that the interest rates offered by banks and financial institutions on unsecured loans in the market ranged from as low as 13.75% to as high as 29.97%.

The sad reality remains that financial institutions are at liberty to charge the interest rate which they wish to apply irrespective of the loan amounts taken by consumers. As such even for a $13,000 loan, consumers can end up repaying more than double the amount due to the high interest rates.

The Council views extremely high-cost loans to be harmful to consumers. When high interest rate is charged, the question is whether consumers can service their debt without having a broader dent on their household consumption. Paying a significant amount in interest that can’t go towards other expenses like food, utility bills, medical care and other necessities, can cause extreme hardship to a family.

In Fiji, there is no capping of the interest rate whereby financial institutions have a maximum limit within which the interest rate can be charged. The main reasons for using interest caps on loans are to protect consumers from excessive interest rates, to increase access to finance and make loans more affordable. A number of countries regulate interest rates with the broad aim of protecting consumers.

Consumers are reminded to exercise some level of responsibility prior to signing any loan agreements. Factors such as interest rates, loan term and total amount payable need to be properly scrutinised before the agreement is signed.

The Council urges consumers to also take advantage of its Debt Management and Credit Advisory Services which is a free of charge service for the benefit of consumers. It is better for consumers to seek advice when unsure rather than end up with high debt amounts making finances unmanageable