Early exit fees on loans slashed

By HELEN LOVELESS, MAIL ON SUNDAY ENTERPRISE EDITOR
Updated:

 

The Department of Trade and Industry is to force loan providers to slash the penalties they charge customers who wish to repay early.

In a White Paper due to be published in the Autumn, with which it aims to clean up and clarify the credit laws, the DTI will cap at one months' interest the amount a borrower will be penalised if they pay off a loan in less than the agreed term.

About seven out of 10 loans are repaid early with an average early redemption fee of two months interest, normally on top of the outstanding debt.

The DTI will also ban the use of the arcane 'Rule of 78', a method used by some lenders to calculate early redemption penalties and under which someone repaying a typical £8000 loan early would face a bill of up to £179 extra.

The DTI believes its action could save borrowers an average of £50 per loan agreement. Lenders will also have to give customers a clear example of how much a penalty charge could cost.

Consumer Affairs minister Gerry Sutcliffe, said: 'The changes will benefit many consumers who want to pay off loans early and those who want to pay off one loan early to switch to a better deal.'

Other reforms, which could come into effect next year, include clamping down on loan sharks, magnifying the small print in loan agreements, stopping irresponsible lending and making it easier to take out a credit agreement online.

According to online bank Egg, three out of four lenders will have to reduce their penalties on personal loans because of the one month interest penalty cap. Figures from Datamonitor show borrowers paid an estimated £322m in early repayment charges in 2002 alone.

But under the same changes, lenders will still be able to force borrowers to give 28 days notice before they pay off a loan - on top of up to one month's interest penalty.

Egg spokesman James Thorpe said: 'Allowing lenders to defer the settlement date in this way effectively means those who want to can continue to charge two months interest. We believe the DTI should instead abolish redemption penalties on personal loans altogether.'

Lenders who currently use the Rule of 78' to calculate how much borrowers need to repay include Nationwide, First Direct and HSBC.

Not only do Marbles, Natwest, Tesco, RBS, Abbey National and Bank of Scotland use the Rule of 78' but these lenders also charge two months redemption penalty if you pay off your loan early.

Lenders who don't charge any redemption penalties on personal loans, nor use the Rule of 78', include Virgin Money, Egg, Woolwich and Barclays.

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