Lenders charging rip-off default interest rates should be exposed

I posted on LinkedIn a week or so back about a lender that is charging a default interest rate of 4% per month. No, you didn’t misread that and I didn’t mis-type it, I said 4% per month. 

It triggered a lot of debate (to say the least) and clearly resonated with people at the top of the industry who want to ensure its continued professionalism and transparency.

Reflecting this, FIBA’s chief executive, Adam Tyler, announced this week on Bridging & Commercial that the Financial Intermediary & Broker Association will soon be publishing lenders’ default interest rates in its online directory of specialist lenders.

Adam said: “We feel that this openness and transparency will be another step forward in the professionalism of the industry.” I, for one, couldn’t agree more.

Charging excessive default interest rates is a practice that is not just irresponsible and self-defeating but highly damaging to the industry. It makes us look like cowboys when the vast majority of lenders these days are professional and highly transparent.

The reputation of the majority is being undermined by the minority.

In a press release, we urged brokers to triple-check the small print around default interest rates for the sake of their clients — and also to be aware of the ruse whereby some lenders conceal default interest rates by setting a very high standard interest rate that is discounted if payment is made on time. This basically means the default interest rate, if payments are late, is labelled as the ‘standard’ interest rate. 

It’s a sneaky practice that has no place in our industry and any lenders that do it should be exposed, all the more so given the slow-moving market, which is putting clients under greater pressure and increasing the likelihood of default.

When our own clients default on their payments, we charge 2%–3% more per annum not per month, with the rate chargeable depending on the event of default. To us, that seems fair and also means the borrower is not put under even greater pressure.

It seems obvious to me that lenders should work with borrowers who are struggling, not least because that way those same borrowers are more likely to get back on track.

Bizarrely, though, some lenders are kicking borrowers when they’re down, which is not just greedy and self-serving but plain myopic.

I suspect some lenders are doing this because competition in the industry means margins are being squeezed and so default interest rates can be an instant boost. It’s almost as if they want borrowers to default, which is utter madness.