Early Redemption Penalties – Am I Being Ripped Off?
How do you assess the cost of a loan?
According to the government, the cost of loan should be completely and clearly illustrated in one easy to compare figure. This figure is known as the annual percentage rate or APR.
The takes the true cost of the loan and expresses in a statutorily defined manner so that it can be used as a comparison figure with all other loans. This means that you can now shop for a loan knowing the APR of all of them and then choosing the loan with the lowest APR. However, the percentage rate will not give you a full picture of the cost of the loan.
As well as the annual percentage rate there are many other costs involved in the actual price of a loan. For instance some require that you pay an arrangement fee. This might be fixed at say one hundred pounds for arranging the loan, or it may be expressed as a percentage of the total loan amount, yet it will not be factored in to the cost of the loan as expressed in the annual percentage rate.
Other hidden extras might include early termination penalties or early redemption penalties . These reduce the flexibility of loans and make it harder for you to save on interest should you discover that for whatever reason, you no longer require the money that you have borrowed.
These types of charges are very common in certain types of mortgage that offer you a discounted rate for the first couple of years which then rises to a higher rate for the rest of the term of the loan. In many cases there is a real justification for such early termination penalties. If you take for example a bank that arranges a mortgage for a borrower with an introductory rate of five per cent for two years, which then rises to six per cent for the remainder of the loan.
The bank in this example will be making a significant investment in lending you this money on these terms. They will be going to the cost of arranging the credit and having it forwarded it to you, but then they will also be willing to give you a lower interest rate based on the fact that they will have the rest of the term of the loan to recoup this initial investment. However, if you terminate the loan early, they will not have the opportunity to make the return on the investment that they have counted on, and therefore, they will charge you a termination fee that is designed to take back the initial discounts and arrangement expenditure that they have spend on you.
Read Small Print BEFORE You Sign
However, such early termination fees as these have to be made known to you before you sign up for any mortgage. If they seem unattractive or too high for you, or if you think there is a high chance that you will be moving and will have to terminate the loan early, then you should not sign up to such a mortgage. However, if you have not been made aware of the fees before you agree to the loan, then there will be a serious case of mis-selling and you should seek legal advice.
Unfair Loan Charges?
There are also, many instances, and many types of loan, where early termination fees are not appropriate and you should become very suspicious of a lender that tries to insert early termination fees into a loan that does not warrant them. There are many loans that do not offer a discounted rate at the beginning of the loan and do not represent a significant cost to the lender to arrange, this can range from credit cards, to personal loans, to bank overdrafts.
You have to ask yourself, if a lender is seeking to impose an early termination penalty, what is the real reason they are seeking to do this? Is there a genuine reason why a termination fee would be appropriate and fair, or is the lender really only seeking to lock you into an oppressive agreement and take advantage of your position.
Getting Out Of The Loan Arrangement
If you feel you are being held to a loan agreement that you no longer wish to be in, because of an unfair early termination fee then you should look over the loan agreement and see what it says. If you have not been provided with a loan agreement you should contact the lender and ask why this is the case. Even if you have an agreement and it provides for an early termination fee, then you can still challenge it on the ground that it is unfair or anticompetitive and if the lender refuses to waive the charge you should speak to your local or if the loan is a mortgage or other high value loan, perhaps get professional legal advice.