Over the past few years, banks have increasingly come under fire for what have been deemed ‘unfair’ or ‘unexpected’ charges and penalties on customers’ accounts. Until relatively recently banks would apply charges of up to £30 per day to accounts as penalties for going into an unauthorised overdraft or bounced cheques or direct debits. As often this occurred a few days before a customer’s payday these charges would quickly rack up, costing upwards of £100 every time. If this happens more than once in a month, people quickly find themselves spending a sizeable chunk of their monthly pay just on bank charges.
The official line from the banks
The banks explained bank charges as being for the necessary ‘administration’ caused by a customer borrowing unauthorised money, but customers soon became wise to the fact that it would cost more to keep charging these high rates day by day than to take a one off penalty payment.
Also, if a person is struggling with their finances and unable to make it through the month on their pay cheque, the least helpful thing the bank could do would be to take more money from them, essentially making them even less better off month by month.
This prompted an investigation by the FSA (Financial Services Authority), who deemed the charges excessive and ruled that banks should charge no more than a £12 penalty charge for unauthorised borrowing, and that customers who have fallen foul of these high charges should be able to go to court to claim back their money.
At the same time, an investigation was made into Payment Protection Insurance (PPI) on bank loans. Often this has been applied to loans without it being pointed out to the customer in advance, and adds a sizable amount to the monthly payments, and how much a customer will be paying off of the loan in the long run.
In many cases, PPI does not apply to the customer (for example in the case of those who are self-employed), meaning those customers are paying extra money for their loan for no reason.
Of course, PPI is a good idea for those in regular employment that are worried their situation might change, especially with the unstable financial climate making jobs more and more scarce. Payment protection in this case will save someone from having trouble making their loan repayments should they become unemployed, and is a useful safety net for people in jobs which may not be completely secure.
However, as the banks have often added this to a loan contract without asking the customer in advance, and have skimmed over the contract before signing, consumers were upset that they had been paying for a service that they didn’t necessarily want. In the small print of these payment protection plans there is often a list of people who will be ineligible should they find themselves out of work, and this was often not discussed either, despite the bank being aware of the customer’s position when selling the loan.
The FSA deemed that banks should also pay back PPI payments to customers who has been mis-sold the insurance, leaving a huge number of consumers going through the courts to take back their overdraft and PPI charges. This is a lengthy process and is not always successful. So what can you do to avoid getting into these situations with the banks in the first place?
If you are hoping to borrow money for a short space of time or unexpected expense, it is worth looking into taking out a short term loan. These loans remove the need for PPI as they are taken out over such a short space of time, and will save you from excessive and unnecessary bank charges by keeping your account topped up until your next pay cheque arrives. You tend to make a payment of around 24% per month, which keeps the process simple enough for you to be able to manage your finances for the next month easily, and as their terms tend to be only a month you stay away from paying large amounts of interest over a long period of time.
Should you be looking for a longer term loan then a bank loan is the safest way to go, but make sure you have the terms laid out unequivocally for you, and that you know exactly what you are paying for. With payday loans the short amount of time and relatively low amounts of cash borrowed means that the whole period of debt is short and painless, but with a larger loan it is a much longer commitment, so it is always worth taking your time and asking the bank to explain everything to you – more than once if necessary!