CHOICE membership

Exorbitant interest rates charged by lending institutions for debit on credit cards, and unsecured loans

banking

#1

I recently was involved in discussion with three line managers at a large multinational bank (Citibank ) regarding the outlandish interest rate/s that are levied against a line of credit,credit card that I have. I tried to make the respective officers understand of my personal thought on the institutions practice of charging what amounted to " loan shark " practices in respect to interest rates was immoral, and completely out of kilter with the basic ethos of the original mantra of banks; when originally founded. The original ethos of a bank was for the secure lodging of ones’ savings; with the ability to loan money out at a fair return to the institution for said such borrowing. I did point out the term Usury [ https://en.wikipedia.org/wiki/Usury ] which was akin to explaining why a paper bag doesn’t hold water for any length of time to try to exemplify the point. I have always tried to be fair, and empathic in dealings I have with others, and can not fathom why these corporations are allowed to benefit ( immorally may I add ) from what is supposed to be a fair transaction between two parties. Banking institutions should be beholding to their customers best interests, and not the interests of shareholders I think. I do not begrudge profit, but when it steps into the realm of legal thievery I tend to draw the line. I delved into the possibility of rolling the money owed into a unsecured personal loan, but was told " no this is not possible ". It was suggested by one of the officers of the bank that I could apply for " hardship " payment options. I made clear that I would not fraudulently apply for hardship, and that was not the point of the discussion that I had entered into. I find the whole system of loans, and interest repayments totally immorally inadequate; especially when, like myself I own no house ( bricks and mortar collateral ) and I am consistently targeted by outlanginish interest rates. I am fortunate that the wage I receive is above the average; but even this without owning a house; I am always being biased negatively against by financial institutions. When interest rates are almost running in negative territory this form of financial extortion is a " bitter pill to swallow ". I will put my " soap box " away for now. Thank You kindly for reading, and may your road always be easy, Peter.


#2

Personal or credit card loans are higher than secured loans such as home loans or a car loan as they are unsecured/collateral free loans. If the loan is in default, it can be costly and time consuming for the financial institution to recover owed monies. Whether the money can be recovered is dependent on the financial situation of the customer and whether the customer has any assets which could be sold to recover outstanding amounts. In some cases, the monies may never be recovered. So, the risk from the Lender’s perspective is higher as in case of default, the lender does not have a mortgaged house/partly owned asset to fall back upon.

ASIC website has information on personal and credit card loans which may be of interest…

On the flip side, if a financial institution was forced ay through regulation to significantly lower interest rates to say close to home loan interest rates, it is highly likely that many would no longer offer unsecured loans which would impact greatly on those who may work but have no assets to secure the loan against. This is potentially the most disadvantaged in our community which rely of such loans for short term financial needs,

Financial institutions also need to ensure that the customer can afford the level of unsecured debt entered into, based on income and existing liabilities. This has also become more relevant after the Royal Commission.

One also needs to determine if a high(er) interest loan is in ones own interests, and not rely only on the information provided by the financial institution, as one is ultimately responsible for debt one accrues.


#3

Banks have moved a very long way from that. Today the great majority of money that they lend they do not have! You might think that they do this trick by borrowing in bulk at a lower rate that they lend to you but that is only part of the system.

Banks are allowed to lend much more than they have on deposit or have borrowed, this has a major effect on money supply. The fraction of lending that they must hold as capital is set by regulation, I can’t find the figure right now for Oz but I seem to recall they can lend something like 15 times their capital. In one example the Commonwealth Bank held 7.1% of its lendings but how you measure these things gets very murky. Apparently this is all kosher by modern economic theory provided they don’t expand by too much too quickly and create inflation.

Here is a graph of money supply in Australia. Note that cash is but a small part of the system.